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PREVIEW: Bank of Canada Policy Decision due 9th June 2021 at 15:00BST/10:00EDT

Published 08/06/2021, 14:53
Updated 05/03/2021, 16:10

EXPECTATIONS

The statement-only affair will see Canada's central bank keeping interest rates unchanged at 25bps, the rate of QE purchases will likely be kept at CAD 3bln/week; it is also expected that it will maintain forward guidance that it will hold rates at current levels until slack is absorbed so that its 2% inflation target is achieved, which the central bank sees occurring in the second half of 2022.

INCOMING DATA

Canadian bank RBC notes that data in the interim has seen output in Q1 and early indications for Q2 somewhat below the MPR projection, though April inflation and RBC's own Q2 tracking estimates are higher. "More importantly, the impressive pace of vaccinations – where more than two-thirds of those 12+ having at least one dose and attention now on second doses – has helped push new cases to levels not seen since October," and the bank argues that now, the focus is on re-opening, which can give analysts more confidence that growth will accelerate in the second part of the year.

TAPER

The BoC reduced its bond buys from CAD 5bln/week to CAD 4bln/week last October, and then lowered that rate to CAD 3bln/week in April. The BoC has said that decisions regarding further adjustments to the pace of net purchases will be guided by Governing Council’s ongoing assessment of the strength and durability of the recovery. Officials have also said that purchases will decline to zero before the output gap has closed, which the bank does not foresee happening until the second half of next year, and then it will taper in a gradual and measured fashion. "Now we’re at the data dependent, let-sleeping-dogs-lie stage of the adjustments awaiting more comfort that activity measures will move upward while evaluating persistence within inflation readings," Canadian bank Scotiabank says, "the BoC likely wants to test the rebound narrative on growth and jobs after a lockdown-induced soft patch and before changing anything again quite so soon after the April changes," it adds.

NEXT TAPER

Scotia thinks there is a low risk that the BoC statement will signal a tapering in July; "instead, look for continued reference to assessing 'the strength and durability of the recovery' and providing 'the appropriate degree of monetary policy stimulus'," the bank writes. That said, the conditions for further tapering could be seen by the July meeting, when the central bank will have more visibility on how reopening trends have fared, and by extension, perhaps greater conviction in rolling back asset purchases (by then, the BoC will have seen another jobs report, its consumer survey, and its business survey). Ahead, and regarding the pace of scaling back its asset purchases, Scotia warns that the longer the BoC waits to taper again, the greater the risk it winds up moving more abruptly and in violation of its policy guidance to date; "this is a key point worth elaborating upon because it will demonstrate that the BoC may have relatively little time during which to compress a lot of decisions in order to deliver on its exit guidance."

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