- The Bank of Canada rate decision is at 15:00GMT/10:00EST and will be a statement only-affair
- Policy settings are expected to be left unchanged, although any hints of a taper announcement in April will be key
- Deputy Governor Schembri to speak the next day on the Economic Progress Report at 18:30GMT/13:30EST
SUMMARY
The BoC is expected to maintain its overnight rate at 0.25%, hold bond purchases at a rate of CAD 4bln per week, and will also maintain forward guidance where inflation is expected to return sustainably to its 2% target in 2023. The meeting will be a statement only affair and will be followed by the Economic Progress Report the next day, which will be delivered by Deputy Governor Schembri at 18:30GMT/13:30EST. Recent GDP data was very strong and well above the BoC’s own expectations and is likely to get a nod from the Bank at the meeting, while an improved vaccination rollout will also be welcomed. A number of desks are calling for a taper announcement in April so any commentary from the BoC that could allude to this will be in focus.
EXPECTATIONS
The Bank of Canada is expected to keep rates unchanged at this meeting at 0.25% and signal no move from the current level through 2022, while two banks expect a hike as early as Q2 next year. Asset purchases are also expected to be left unchanged at CAD 4bln per week, while 15 of 21 analysts surveyed by Reuters expect the next move from the BoC will be a taper of asset purchases. Forward guidance is also expected to be maintained; “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. In our projection, this does not happen until into 2023”.
RECENT DATA
The latest GDP data was impressive, as seasonally adjusted growth printed at 9.6% Q/Q on an annualised rate in Q4, above the 7.5% pace expected. Analysts at Scotiabank highlight GDP growth doubled the BoC’s expectations while preliminary tracking continues to exceed the central bank's projections. The desk adds “the economy remains on track to close spare capacity much sooner than the Bank of Canada has projected which is in keeping with our expectations for earlier rate hikes than the BoC’s 2023 guidance indicates”. Scotia suggests “that probably points toward a coming narrative reset in the BoC’s April MPR”. The January inflation report rose 1% Y/Y, above expectations for a 0.9% rise and at a faster pace than the prior 0.7%, while the core metrics also rose at a faster pace. The BoC eyed core metrics (average of the median, trim and common) ticked up slightly to 1.5% from 1.4%, due to a revision lower on the median metric the month before. The recent rise in oil prices will only add further gains and RBC expects it will likely send CPI temporarily higher into the spring, and the bank expects inflation trends to continue towards the BoC’s target rate as restrictive measures and virus threats ease later this year.
APRIL
Although there is little expectation for any policy or guidance change at the March meeting, some analysts have suggested it could be a precursor of what is to come in April with several banks suggesting the BoC could announce a tapering of bond purchases at the April 21st meeting alongside its MPR, therefore any hints of a potential taper announcement will be eyed in light of recent developments around vaccine optimism, reopening and strong growth data. Scotiabank’s own view is that “the next steps toward curtailing monetary policy stimulus should arrive as soon as next week if not in the April MPR that revisits all forecasts”. Scotia also highlights that the BoC’s control over short term market rates has come under pressure again with the Canadian Overnight Repo Rate Average (COPRA) falling further beneath its 0.25% target which is being primarily driven by excess liquidity due to the BoC’s LSAP’s relative to the decline in issuance.