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business briefing

Briefing highlights

  • What to expect from Poloz this morning
  • BMO raises dividend as profit jumps
  • Markets at a glance
  • Quebec building sector hit by walkout

Fear itself

As Mark Chandler sees it, the Bank of Canada has “more to fear now than fear itself.”

So markets will be watching closely for the tone of this morning’s rate-decision statement from Governor Stephen Poloz and his central bank colleagues.

They’re not expected to change their benchmark overnight rate from its current 0.5 per cent at 10 a.m. ET. What’s at play is their language since their similarly stand-pat decision and monetary policy report in April.

But some things have changed since then, notably on the housing and trade fronts.

“The BoC can take some comfort in the cautious tone delivered in its last rate statement, despite signs of improved activity at the time,” said Mr. Chandler, Royal Bank of Canada’s head of fixed income and currency strategy.

“The governing council acknowledged the strength – with the economy still on track to deliver the 3.8-per-cent GDP growth forecasted for Q1 – but also the ‘significant uncertainties weighing on the outlook,’” he said in a report titled “BoC has more to fear now than fear itself.”

“In the subsequent press conference, they specifically noted ‘uncertainty regarding the tax and trade policies of the U.S. administration’ and household spending as a ‘downside risk over the longer term.’ Developments on both these fronts since the April MPR provided more concrete examples of how they could dampen the outlook in the quarters ahead.”

Trade tensions between Canada and the U.S. have indeed escalated, with the Trump administration slapping countervailing duties on softwood lumber, triggering the renegotiation of the North American free-trade agreement, and launching a probe into Boeing Co.’s complaints against Bombardier Inc.

Mr. Chandler also cited mounting concern among investors over Canada’s housing market in the wake of the chaos at Home Capital Group Inc. and the downgrade of Canada’s banks by Moody’s over record levels of household debt.

Speaking publicly, Mr. Poloz has rejected concerns over Home Capital as an isolated event, though the central bank has been openly fretting about household debt for years.

“These trade and housing developments – while serious – remain threats to the outlook, rather than a shift in the central bank’s core forecast,” Mr. Chandler said.

“As such, the bank can legitimately suggest that things are unfolding ‘about as expected in the April MPR,’ the same target date will likely remain in place for the closing of the output gap (first half of 2018) and the current stance of monetary policy will be deemed ‘appropriate.’ We expect no forward guidance on eventual removal of monetary policy accommodation.”

Mr. Chandler said separately he doesn’t expect much comment from the central bank on the loonie, despite the record shorting of the currency by speculators.

“I don’t think they are that fussed.”

What all of this means is that we can expect the central bank to do nothing for some time yet.

The economy may be perking up, added Toronto-Dominion Bank economist Diana Petramala, but tame inflation and government measures aimed at cooling down the housing market will allow the central bank to wait until next spring before moving on rates.

Or, as Benjamin Reitzes put it, Mr. Poloz and Co. are “comfortably neutral,” so there’s not a lot of “intrigue” at this point.

“There has been lots of noise over the past month – alternative mortgage lenders, Toronto housing bubble, oil prices dropping, turbulence around Trump – none of that should immediately influence the BoC, but rather place them more firmly on hold,” said Mr. Reitzes, Canadian rates and macro strategist at Bank of Montreal.

BMO boosts dividend

Bank of Montreal kicked off earnings among Canada’s big banks with a jump in profit and a higher quarterly dividend.

The bank boosted its payout by 2 cents to 90 cents as second-quarter profit rose to $1.25-billion, or $1.84 a share, from $973-million or $1.45 a year earlier.

Adjusted earnings per share rose to $1.92.

“We remain confident in our ability to grow and create value in an evolving environment,” chief executive officer Bill Downe said in unveiling the numbers.

Markets at a glance

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