PREVIEW: BoC policy announcement - Rates, QE & Guidance Expected To Be Unchanged

The Bank of Canada is expected to maintain rates at 0.25%, asset purchases at CAD 2bln/week and guidance for a rate lift-off is also expected to be left unchanged, in H2 of 2022.

The meeting is a statement only affair and will not be accompanied by the MPR and forecasts, but there may be some caution warranted given the soft Q2 GDP report.

On tapering, the current consensus is for another CAD1bln/week taper in October, taking purchases to CAD 1bln per week, alongside its updated MPR and forecasts. There is no press conference scheduled for tomorrow's meeting either, although Governor Macklem is speaking on "QE and the reinvestment phase" the following day, where we can expect to gather more colour on this theme.

ECONOMY

Growth out of Canada has slowed recently, Q2 GDP contracted 1.1% on an annualised basis, missing expectations for a 2.5% gain and beneath the BoC's own forecast of 2% growth. June saw a 0.7% M/M rise as expected, but StatsCan estimates that July GDP most likely contracted by 0.4%, which may pose concerns for Q3 GDP.

Analysts at TD Securities highlight the release will be closely watched for signs the BoC is losing faith in its forecast for the output gap to close next year, or whether they believe it is a temporary blip due to the third COVID wave. TD expects the Bank to acknowledge the outlook has weakened since July, but likely suggest growth is expected to pick up due to robust household spending and demand for exports while rising COVID cases and the Delta variant will likely be mentioned as the most prominent risk to the outlook, as CPI commentary will be little changed with focus on temporary factors.

Note, the next jobs report is due on Friday, after the BoC meeting, but current expectations are for a 100k rise in August from a 94k rise in July.

ASSET PURCHASES

The BoC is expected to leave its asset purchases unchanged at USD 2bln/week at this meeting, although 16 out of 19 economists surveyed by Reuters expect the next CAD 1bln taper to CAD 1bln/week to take place in October, alongside its updated MPR and forecasts. Note, there is no press conference scheduled, but Governor Macklem will be speaking on 9th September 2021 at 17:00BST/12:00EDT on "QE and the reinvestment phase".

With the taper process approaching an end Scotia suggests Macklem could guide that the end of asset purchases is nearing over the "coming meetings", and with that, it is key to look at the next steps, such as reinvestment. The desk highlights we last heard about reinvesting purchases back in March, when the Bank said “we would arrive at the reinvestment phase of QE some amount of time before we start to increase the policy interest rate”, and with current guidance expecting a hike in the latter half of 2022 we could start to hear more about the process at upcoming meetings and via speeches.

The topic is quite vague as we do not know how long they will reinvest for, but Scotia expects the Governor to signal that "this reinvestment phase will be conditioned around the durable achievement of the Bank of Canada’s 2% inflation goal and inclusive recovery language without committing to a time period."

We are also in the dark regarding what style they will use to reinvest the maturing flows. Scotia suggests it could reinvest on a matching flows basis as the maturities arise or on a regular averaging basis, ie, just under CAD 1.5bln/wk to match maturing bonds. The composition will also be key, ie will it favour a neutral move across the curve or favour some maturity benchmarks over others.

GUIDANCE

Currently, BoC guidance is for rates to be maintained at 0.25% until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved, and it expects this to happen sometime in H2 22. Despite a poor Q2 GDP report, the latest poll shows 16/19 analysts expecting at least one hike by the end of 2022, compared to 14 in July, but notes that the 0.4% StatsCan expectation for July GDP gives support for a cautious stance.

Wells Fargo notes that despite a brief period of slow growth, the economic recovery remains on track, all while inflation has firmed significantly and suggests if inflation or growth were to surprise to the upside, an initial hike could come earlier than expected. Analysts at TD Securities see no reason for the BoC to change the forward-looking section of the statement but does raise the possibility that the Bank will signal the risk of a later hike, though it makes more sense to keep all options open.

ELECTION

Canada is headed for an early federal election on 20th September, but 15 of the 18 economists surveyed by Reuters said the outcome would not have a material impact on their views on the Canadian economy and monetary policy in the medium-term, thus will unlikely have an impact on future monetary policy.

However, analysts at BMO said it is looking likely to be a minority government, but "it does look like there will be more spending almost no matter who wins, but again, we don't really know what will go through, so won't really be changing any forecasts, it's just too close to call at this point".

Given the election is upcoming, it may be interpreted as a sign that the BoC will hold off on any large decisions at this meeting, so the overall outcome is expected to be rather mundane with no changes expected in rates, asset purchases, or guidance, anyway.

REACTION

TD suggests some caution is warranted after the soft GDP prints as the Bank will need to acknowledge the recovery is weaker than expected and given StatsCan see a 0.4% contraction in July, it may push the closing of the output gap further out, which is what the BoC has staked its guidance on. The desk highlights that although it "may not necessarily delay tightening, given where 1y1y trades, the risk/reward leans towards positioning for a dovish repricing." However, this has yet to make a way into the CAD as much of the move higher in USDCAD has been as a result of the dollar following a hawkish Fed in June.