Dovish Central Bank View Likely Remains Intact

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Canada’s growth will likely slow in Q3 after experiencing a robust rebound in Q2. Such confirmation would reinforce the Bank of Canada’s dovish growth and inflation outlook, which was challenged by the acceleration in October core consumer prices. The central bank is likely to maintain its dovish tone next week, as the as-expected return to more modest growth in Canada combines with reduced oil prices and increased concern by monetary authorities in Asia and Europe over deflation risks.

Canadian GDP is expected to expand at a 2.3% clip in Q3 after the upwardly revised 3.6% pace in Q2. Moreover, the details should be consistent with the Bank of Canada’s outlook, as exports improve and business investment nudges higher. Consumption spending and residential investment growth rates should remain firm, maintaining the still elevated risk to monetary policy posed by household debt.

The monthly retail sales volume figures point to a slowing in the pace of Q3 consumption spending after the temporary boost to Q2 that came on the heels of the weather drag in Q1. Spending is expected to slow to a still strong 3.0% clip in Q3 from the 3.6% pace in Q2, as low interest rates underpin household spending. Notably, the combination of lower gasoline prices and low interest rates could provide a boost to spending in Q4

Governor Poloz has downplayed the implications of firmer growth or inflation for policy, saying the bank has the tools to deal with growth and inflation outcomes that come in hotter than expected. Growth and inflation that undershoots estimates would be ominous for policy given that rates are so low, making it a much more difficult situation for policy. Hence, intensified concerns over deflation globally suggest little change to the BoC’s announcement next week relative to October, in turn supportive of an extended period of steady rates that lasts through much of next year.

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