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PREVIEW: Bank of Canada Rate Decision

By Newsquawk Voice Ltd (Ryan Anderson)Market OverviewDec 08, 2021 12:08
PREVIEW: Bank of Canada Rate Decision
By Newsquawk Voice Ltd (Ryan Anderson)   |  Dec 08, 2021 12:08
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  • All policy settings are expected to be left unchanged.
  • Focus on commentary regarding Omicron.
  • Statement only affair, with no MPR or press conference with Governor Macklem.


The BoC will keep rates unchanged at the effective lower bound of 0.25% at its December meeting. Traders will be more attuned to commentary on the new Omicron variant as well as any insight about inflation.

After recently completing its tapering of asset purchases, entering the reinvestment phase and bringing forward its guidance to the "middle quarters" of 2022 from "the second half" of 2022, this meeting is not expected to bring many fireworks, with no MPR release, nor press conference from Governor Macklem.

ING expects the Bank to tread carefully and to likely announce a continued reinvestment of maturing assets on their balance sheet "emphasising that time is needed to assess the scientific data on the potential implications of the new Covid strain". Commentary on Omicron will be the focus and it will likely see a mention in the statement and how it is a risk they are monitoring. Given there are only a handful of cases in Canada, and the economy is progressing more or less as expected, alongside hot CPI, it is unlikely the BoC would adjust their current guidance on fears around the new variant, especially given how recently it was discovered and how little we know about it, while the January or Mach 2022 meetings would be more appropriate to adjust this, if it is required.

Note, there is no press conference after the meeting, but Deputy Governor Gravelle will provide an economic progress report the following day at 19:00GMT/14:00EST, ahead of Governor Macklem next week on 15th December at 17:00GMT/12:00EST.


The new Omicron variant will likely provide the Bank with a reason to act concerned, but not enough to alter the course of monetary policy given the strong economy and rising inflation. The BoC will likely acknowledge it as a risk and it is something they are monitoring.

In early data, Omicron appears to be more transmissible, but the symptoms have only been mild while we are awaiting data on confirmation on vaccine efficacy, which should be expected in a couple of weeks, but officials are optimistic.

There have been travel measures introduced across the globe, while countries in Europe have implemented new restrictive measures, but not as extreme as the 2020 lockdowns. Restrictions in Canada appear to be only related to travel with temporary border restrictions in place, therefore it is unlikely to have such a detrimental effect as prior measures.

ING's base case "is that Omicron is a scare rather than the catalyst for another round of lockdowns that would derail the recovery story. If correct, the arguments for a swift tightening of the Bank’s monetary policy stance will look justified". There is also the case to be made that the new variant could stoke inflation fears even more, and with inflation running above target, it could even strengthen the case for policy normalisation.


Canadian bank RBC notes that economic progress has largely unfolded in line with the central bank's expectations: inflation is running above the BoC's target, while labour markets have not yet normalised fully to pre-pandemic levels. "However, with job vacancies at historically elevated levels, the weakness is more likely tied to insufficient labour supply," RBC explains, "and we expect that will start to put upward pressure on wages in coming months."

Inflation has been running above the BoC's target and Governor Macklem previously noted that price pressures have been "stronger and more persistent than expected" and that bottlenecks and supply chain woes are not easing as quickly as first thought, therefore any mention of this in the December statement should not come as a surprise, and it is a view held by many other central banks, including the Fed.

RBC also argues that keeping rates in Canada at emergency low levels will need to be reassessed soon: "We continue to expect the first rate hike to come in April next year, and the BoC to reiterate at the meeting that, barring significant further disruptions from the new virus variant, the economy is on track to fully recover by mid-2022." Meanwhile, analysts at ING foresee a 25bp hike at the March meeting, with three more moves in 2022 given less spare capacity than most other economies.


ING points out there is a potential the Bank could alter its inflation target which could come alongside Wednesday's policy statement, but the desk expects it will be delayed until a slightly later date. ING highlight the inflation target adjustment could be more explicit about tolerating inflation overshoots that would follow that of the Fed's average inflation targeting (AIT). ING does not see the need for a radical shift in the target given the Bank already has a tolerance of 1-3% and while it will likely remain above that next year, it is in very unusual times with a large amount of inflation resulting from the pandemic.

PREVIEW: Bank of Canada Rate Decision

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PREVIEW: Bank of Canada Rate Decision

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