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Bank of Canada Preview: Nine major banks expectations

Today, the Bank of Canada (BoC) Interest Rate Decision is scheduled at 14:00 GMT and as we get closer to the release time, here are the expectations as forecasted by the economists and researchers of nine major banks, regarding the upcoming announcement. The BoC is set to leave its interest rate unchanged at 0.25% while reiterating its commitment to keeping policy accommodative. Furthermore, the central bank is unlikely to change its guidance regarding asset purchases. 


“BoC is expected to keep rates and its current government bond buying plans (at least C$5 billion per week) unchanged. Governor Macklem will give the Economic Progress Report speech the day following the meeting. Citi analysts look for signs BoC could lean towards shifting the policy objective towards a more dovish approach similar to Fed’s new flexible average inflation targeting.”


“The BoC will keep interest rates unchanged at 25 basis points. The Canadian economy has performed midway between the US and Europe with output falling a little over 13% through the first half of the year. Growth has now returned, but the spare capacity in the economy means the prospect of a rate hike is very distant, especially given added uncertainties relating to Canada’s higher weighting of foreign trade and commodities relative to the US. Like everywhere else, high-frequency indicators have pointed to a recent levelling off in activity suggesting the dovish tone from the central bank will persist, especially with inflation remaining benign given the large output gap.”


“BoC meeting should be a fairly quiet affair — especially following the events of the last six months. First, there is no scope for changing the overnight rate: while Macklem has moved quickly to align the Bank’s policy stance with his own views, the BoC remains adamant that a move below 25 bps would not be sensible at this juncture. Conversely, with conditional forward guidance in place, there is no need for the Bank to alter their language around future rate hikes. Second, economic activity has surprised materially to the upside relative to the central scenario from the July Monetary Policy Report. Not only did Q2 GDP fall by less than the Bank had expected at an annualized -38.5% (BoC: -43%), the July flash estimate for industry-level GDP implies that the Q3 GDP should expand at more than a 40% pace (BoC: 31.1%). All told, we’re looking for 2020 growth at -5.9%, almost 2 full percentage points above the Bank’s last forecast (-7.8%). The BoC will have to acknowledge that economic performance has been better than expected so far, along with the potential for further support if the Liberal government is able to survive its Throne Speech later this month. Lastly, with credit spreads tightening over the last two months the BoC is likely to conclude that their credit easing programs are having the desired effect. That Bank will have to note that inflation has been around 0%, but they are also likely to argue that inflation expectations remain well-anchored. Suffice it to say, we expect the tone to be upbeat by 2020 standards.”

RBC Economics

“New government aid to replace CERB will soothe worries that exceptionally weak labour markets will outlast policy supports. So policymakers might strike a more upbeat tone. But the latest economic improvements won’t be enough to move the bank’s stance on accommodative monetary support. The main thrust – a commitment to keep the policy rate in place until economic slack has been absorbed and a continuation of GoC purchases of at least C$5B per week – is unlikely to budge in Wednesday’s meeting.”


“With the economy still needing a ton of stimulus, and with policymakers reluctant to bring their main tool into negative territory, we expect rates to remain at the effective lower bound. Turning to QE, although the Bank may acknowledge a deceleration in the pace of its purchases, it is still likely to reaffirm its commitment to buy large amounts of government bonds ‘until the economic recovery is well underway’. At some point in the future, as the economic outlook becomes clearer, the BoC will need to provide more guidance on the policy rate. We expect this to come in the form of explicit forward guidance, likely in the fall. Note that the policy announcement will not be followed by a press conference. We should nonetheless get more details about the BoC’s thought process on the following day when Governor Tiff Macklem delivers a speech to the Chamber of Commerce.”


“The BoC has nothing to announce on interest rates and lots of wiggle room to fine-tune its QE program without making a formal announcement of any changes in weekly volumes, as long as it wants to stay above the C$5B per week minimum. For now, it’s happy enough with where yields sit to want to avoid rocking the boat. Governor Macklem has a speaking opportunity that he can use to reinforce their low-for-long message if need be.”


“We’re not expecting any major changes to rates or QE. Indeed, the backdrop has improved since the last meeting in July. While the recovery still has a long way to go, it’s clear we’re in a better place than the BoC expected six weeks ago. Indeed, the statement is expected to note as much, while focusing on the risks still ahead and the fact that a full recovery is still many quarters away. The key for the BoC will be to reinforce that policy will remain extremely accommodative for some time yet. The strong run in the domestic data has been impressive; and, while our upgrade of the 2020 growth forecast last week is a notable positive, GDP will likely remain 3%-to-4% below February 2020 levels at year-end. To put that in perspective, the peak-to-trough drop in GDP during the 2008/09 financial crisis was 4.7%. So even with the better backdrop, there will be plenty of ground to make up in 2021, necessitating ongoing monetary policy support.”


“We expect the Bank of Canada to leave the policy rate unchanged at 0.25%. This is fully expected by both analysts (Bloomberg survey) and traders. Bond purchases are likely to remain at a minimum of CAD 5B a week but we remain of the view that this might need to be increased further down the line. This decision will only be accompanied by a statement with the next Monetary Policy Report due at next month’s meeting on October 28th but Governor Tiff Macklem will release an economic report on Thursday. The statement is likely to maintain a cautious tone. Despite recent data printing above the Bank’s worst fears, significant risks remain and there is still considerable slack.”


“Material changes to policy measures are not expected at this meeting but guidance may be important across several fronts. The statement itself is likely to repeat the line about. As the economy moves from reopening to recuperation, it will continue to require extraordinary monetary policy support. This is the BoC’s way of tamping down enthusiasm toward recovery readings. Also watch for repeated forward rate guidance that included the line – The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved.”


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