Bank of Canada: Energy risks complicate October decision - RBC

Rachel Battaglia at Royal Bank of Canada (RBC) argues that higher backward-looking population growth implies stronger potential output, mechanically reducing pressure on the Bank of Canada (BoC) to hike rates. Yet she notes policymakers are increasingly focused on energy price risks, and with key slack indicators like unemployment and business surveys unaffected by demographic revisions, the October policy meeting remains a difficult call.

Revised potential GDP meets energy risks

"From the Bank of Canada’s perspective as policymakers consider interest rate hikes, higher backward looking population growth estimates imply the economy’s production potential was stronger than previously thought (all else qual, such as productivity estimates)."

"But other real-time indicators of slack in the economy like business survey responses on excess capacity, the unemployment rate, and core inflation trends are all unimpacted by changes in population estimates."

"The BoC will be closely monitoring these indicators ahead of their next policy decision in October."

"On the surface, mechanical upward adjustments to potential GDP via revised population estimates, would reduce urgency to hike rates, but with the BoC increasingly focused on “risks” from energy prices it makes the October meeting a difficult decision."