The Bank of Canada (BoC) will announce its monetary policy decisions at 3pm, and as we approach publication time, here are economists’ and major banks’ researchers’ forecasts for the upcoming announcement. It is widely expected that the BoC will leave its interest rate unchanged at 0.25%, but a reduction in asset purchases could help the Canadian Dollar (CAD) remain resilient against its US counterpart. The USD/CAD exchange rate is consolidating just below 1.24 on Wednesday.
- BoC is ready to further reduce QE purchases to CAD 1bn per week
- Inflation concerns likely to be at the forefront
- Markets are pricing in more than 30bp of rate hikes by the April 2022 meeting
Price broke out from the inside bar, MACD is bullish. From the technical point of view the pair looks bullish… but today’s BoC rate decision can spoil the picture or confirm it… so let’s wait to the data release.
– The BoC is poised to further reduce QE purchases to CAD 1bn per week and the programme is likely to end in December as the market is increasingly pricing in rate hikes in 2022. We expect a neutral impact on CAD, which seems to have most of the positives already contained in the price and may experience a correction in the near term.
– Inflation concerns are likely to be at the forefront. The BoC will point to persistent supply chain constraints as an obstacle to near-term growth and as a reason for rising consumer prices. The key question is how long inflation will remain above the bank’s target range of 1% to 3%.
Domestic monetary policy can do little to counter the challenges of the global supply chain and rising commodity prices. But a strengthening labour market and inflation data suggest the economy is strong enough for the central bank to continue to reduce monthly asset purchases.
The BoC has said it will not raise interest rates until the economic slump is absorbed. Weaker near-term GDP data suggests this may come later than previously thought. However, given the shrinking labour market and higher inflation, the BoC is likely to maintain its stance that rates will rise in the second half of next year. If anything, the risks are tilted towards rate hikes starting even earlier.
– We expect the BoC to argue that the rise in inflation is largely transitory, and to keep the overnight rate forecast unchanged with rate hikes expected in 2022. 2 We also expect the BoC to announce an end to the QE programme in its current form, with a reinvestment phase starting in November.
– BoC will lower its growth forecast for 2021. (likely meaning a slightly longer wait for the demand gap to close), raise its short-term inflation forecasts, keep rates unchanged and announce a reduction in secondary market bond purchases to CAD1bn per week.
– The BoC meeting this week is probably not the right time for a change, as the spread between actual and potential growth (the demand gap) is unlikely to close earlier than the current forecast for the second half of 2022. This forecast remaining unchanged could be a disappointment for markets pricing in more than 30bp of rate hikes by the April 2022 meeting. However, we expect the BoC to further reduce the pace of asset purchases to CAD1bn per week.
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