- Bank of Canada rate decision on Wednesday April 21st at 15:00BST/10:00EDT; Governor Macklem will hold a press conference at 16:00BST/11:00EDT
- Rates expected unchanged at 0.25%, although it is expected to announce a taper to CAD 3bln/week from CAD 4bln/week; analysts will also be on the lookout for guidance changes
- MPR expected to show upgrades to growth
SUMMARY
The Bank of Canada is expected to leave rates unchanged at 0.25% although it is expected to announce the start of its tapering programme, where 15/17 analysts surveyed by Reuters expect this to be announced. The latest MPR will be released as well, where we can expect upward revisions to growth as the economic recovery looks to occur earlier than initially expected, while CPI forecasts will also likely be revised higher. There is also attention on any potential guidance change, currently, the BoC’s guidance is for the BoC to 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 the Bank’s January projection, this does not happen until into 2023”, and some analysts are paying attention to whether this is bought forward given the strong economic data out of the country, even with Ontario’s restrictive measures, showing the resilience of the Canadian economy. However, with the taper announcement, BoC Deputy Governor Gravelle said “adjusting the pace of QE purchases won’t necessarily mean that we have changed our views about when we will need to start raising the policy interest rate”. Governor Macklem will hold a press conference at 16:00GMT/11:00EDT where he will likely explain any changes to policy.
TAPER
Analysts are expecting the BOC to announce a taper of its asset purchases, with the consensus looking for a CAD 1bln weekly cut to CAD 3bln/week from CAD 4bln/week, RBC suggest this is seen as modest easing off the monetary policy accelerator, rather than tapping the brakes. The expectations for a taper announcement at this meeting were cemented after BoC Deputy Governor Gravelle hinted it is coming, as he announced that the BoC is evaluating how the process of adjusting ongoing purchases of GoC bonds could unfold. Analysts at TD Securities do not expect the taper announcement to have too much of a reaction; TD provide three reasons: 1) It has been well telegraphed; 2) Primary market supply will fall with GoC supply expected to fall significantly; 3) Tapering will be concentrated in the front end of the curve. The desk highlights the BoC buys USD 1.75bln a week of 2s and 3s, and TD expects it to fall by USD 750mln by May and would not be surprised if the full USD 1bln taper was concentrated in the 2-year purchases.
MPR
The forecasts in the January MPR expected 2021 growth at 4.0%, 2022 growth at 4.8% and 2023 growth at 2.5%, although economic data since then has been strong and has proved resilient amid fresh lockdown measures. Strong job numbers has seen Canada recoup 90% of the lost jobs from the pandemic and should help upside for growth in the near term as the recovery starts to occur earlier than initially expected. Many desks are looking for the BoC to upgrade its GDP expectations; TD is currently tracking 2021 GDP growth at 5.9%, with 2022 growth at 3.7%, implying a roughly 2pp upward revision that would be offset by a roughly 1pp downward revision in 2022. CPI forecasts are also expected to be revised higher, the January MPR saw 2021 CPI inflation at 1.6%, 2022 at 1.7% and 2023 at 2.1%. TD look for a 0.3pp rise to 1.9% in 2021 and for 1.8-1.9% in 2022. Although there is some cause for concern given the latest restrictive measures in Ontario, a survey by Reuters found the threat to growth from tighter lockdown measures and another wave of the virus is unlikely to derail the economic recovery in Canada, according to 16/21 analysts surveyed. In January, the BoC estimated the output gap narrowed to between -3.75% and -2.75% in Q4 2020, and is expected to close in 2023, although the timing is particularly uncertain. The neutral rate currently stands at 1.75-2.75%.
GUIDANCE
There is the potential for a guidance tweak. Currently, the BoC’s guidance is for the BoC to 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 the Bank’s January projection, this does not happen until into 2023”. RBC write “the larger question is whether their forward guidance will be tweaked to flag any pull-forward in expectations for the first interest rate hike from exceptionally low current levels”. The desk writes with the new budget, which has over CAD 100bln in new spending over three years, it provides an upside boost to growth and could lead the BoC to lift rates earlier than initially guided, while other desks note the probability of a 2022 hike is growing. Note, however, BoC Deputy Governor Gravelle said that “adjusting the pace of QE purchases won’t necessarily mean that we have changed our views about when we will need to start raising the policy interest rate”.