Central Banks


Bank of Canada decision coming on Wednesday

The Bank of Canada decision is due at 1400 GMT on Wednesday and expectations for any kind of policy shift are low.

However there will almost certainly be an upgrade to growth projections as Canada — like almost every economy — has rebounded faster than economists initially anticipated.

The current estimate is for a 7.8% contraction this year that compares to the private consensus currently at -5.7%. How the upgrade interacts with 2021 will also be critical. The current forecast is for a 5.1% rebound and the consensus is +4.9%.

July forecasts:

BOC forecasts

In terms of communication, the key line will be whether the BOC reiterates that “the Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved.”

Even with a growth upgrade, it’s highly unlikely the BOC will offer any hint of a hike before 2023, if not longer. This may be signaled by a combination of the timing for the closure of the output gap, along with some kind of hint at accepting above-target inflation, or waiting for inflation to firmly and sustainably hit the target before hiking. At this point, the best we can hope for is a hint in that direction as the BOC wraps up a mandate review due to be completed in 2021.

Another thing that I will be watching very closely for is talk on negative rates. Macklem recently left the door open for negative rates, saying they wouldn’t take it out of the toolbox. Any further shift in that direction would undoubtedly be deliberate, even if there’s minimal risk of a move in that direction in the next few months.

As for the Canadian dollar, I don’t expect this meeting to sway the currency in any significant way unless there is a huge surprise along the lines of yield curve control or a meaningful QE change. Even then, the loonie will remain preoccupied with the US election, energy prices and the virus.

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