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PREVIEW: The Bank of Canada Rate Decision And MPR

Published 27/10/2021, 12:43
Updated 05/03/2021, 16:10
  • The Bank of Canada rate decision and MPR will be released Wednesday 27th October at 15:00BST/10:00EDT.
  • Press conference with Governor Macklem at 16:00BST/11:00EDT.
  • Rates to be left unchanged; asset purchases expected to be tapered from CAD 2bln/week to CAD 1bln/week.
  • Focus on language regarding recent hawkish market pricing.

The Bank of Canada is expected to maintain its Overnight Rate at 0.25%. Weekly asset purchases are likely to be tapered further, reduced to a rate of CAD 1bln/week from the current CAD 2bln/week. Currently, the bank’s guidance is for rate lift-off to occur sometime in the second half of 2022. Money markets are pricing a more hawkish course for the BoC and will be focussing on whether there is any change to this guidance. Many do not expect guidance tweaks at the October meeting, with changes more likely to be made in December as the tapering process concludes. Since the last MPR meeting in July, economic data has been mixed: inflation continues to pick up, GDP data has disappointed, employment, however, has been solid. Analysts think the BoC will raise its inflation forecasts within the updated economic projections, and continue to reiterate a ‘transitory’ view of price pressures while growth forecasts are expected to be revised lower.

EXPECTATIONS

The BoC is expected to keep its target for the Overnight Rate unchanged at the effective lower bound of 0.25%, but is expected to reduce its asset purchase programme by CAD 1bln/week, taking the amount of purchases to CAD 1bln/week. But some – like Dutch bank ING – expect the December policy meeting to result in purchases being halted completely given a successful vaccine roll-out, declining COVID cases and hospitalisations. With asset purchases winding down, attention turns to the reinvestment phase which analysts at Scotiabank see lasting through 2022 at a minimum, and likely lasting through at least several of the first few rate hikes. Current guidance from the BoC says rates will be left “at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved. In the Bank’s July projection, this happens in the second half of 2022”. There is a risk that rate hikes could be seen earlier given the recent hawkish market pricing, but many think this is perhaps more appropriate at the December meeting, where it is expected to completely wind down asset purchases.

MPR

Analysts look for inflation forecasts to be marked higher after the recent hot readings, which is tracking above the BoC’s target and higher than that of the July MPR, although it will likely still be framed as transitory. Analysts see 2021 CPI being revised higher to 3.1% from the 3.0% in the July MPR, and 2022 forecasts are seen rising to 2.5% in 2022 from the prior 2.4%. Growth is expected to rise 0.7% in August, according to StatsCan, a welcome sign after some of the more disappointing results of Q2 and downward revisions to Q1, but desks highlight that Q3 GDP growth is tracking beneath the July MPR forecasts, and therefore a revision lower of the 7.3% Q3 forecast is still on the cards. For 2021, analysts see growth of 5.0%, down from the 6.0% projected at the last MPR, while the 2022 growth view is likely to be lowered to 4.0% from 4.6%.

RECENT COMMENTARY

BoC Governor Macklem recently warned that supply chain challenges and bottlenecks were not easing as quickly as he’d initially hoped, but he said medium-term expectations were well-anchored, and he was not seeing evidence of sustained inflation just yet. Meanwhile, the BoC’s Business Outlook survey revealed continued improvement in business sentiment to the highest on record, with most firms continuing to expect healthy growth in both domestic and foreign demand. It did however note that businesses were facing supply constraints that will limit sales and put upward pressure on costs. Labour shortages have also intensified while supply chain disruptions have worsened, and businesses expect this to persist until H2 2022. The latest Survey of Consumer Expectations for 1yr ahead inflation hit a record high at 3.72%, but the spike is seen as transitory. Macklem will likely reiterate similar themes in his press conference, noting the supply chain disruptions and acknowledging the rise in inflation, but reiterating it will be transitory and that supply chain disruptions are likely to be more persistent than initially expected.

MARKET PRICING

Market pricing has leaned hawkish, with OIS pricing in around three hikes by the end of next year, with the first one seen at the April 2022 meeting, earlier than the BoC’s guidance of ‘sometime in the second half of 2022’. A recent poll of economists has the BoC raising rates to 0.5% in Q3 of 2022, earlier than the Q4 2022 they had predicted in the September poll; those surveyed see the main risk as the Bank of Canada raising rates earlier than economists expect, according to 18 of the 20 polled. Macklem will likely attempt to cool the hawkish market pricing, but will still emphasise the central bank’s current lift-off guidance (providing there are no wholesale changes to it in the statement).

REACTION

With recent market pricing leaning hawkish, it may leave some room for a price reaction, likely from the press conference as any language used from Governor Macklem to address the recent hawkish pricing will be key. He is expected to walk a fine line between pushing back too hard on rate rises which would then limit their optionality next year when it comes to hiking, but no pushback at all would suggest a level of comfort with current market pricing. Analysts at Scotiabank said that “no push back from the Governor would be bullish for the CAD, and perhaps drive incrementally more conviction about earlier rate hikes.” The bank also highlights that with rate hike expectations building as strongly as they have it “risks either ‘bouncing’ policymakers into an earlier hike than they might otherwise want or driving heightened market volatility if those expectations are not met”.

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