• BoC Preview: Nine major banks expectations

    Today, the Bank of Canada (BoC) Interest Rate Decision scheduled at 14:00 GMT and as we get closer to the release time, here are the expectations as forecasted by the economists and researchers of nine major banks, regarding the upcoming announcement. The market consensus is for the Boc to leave the rates unchanged at 0.25%. What’s more, Governor Macklem’s first Monetary Policy Report will be released at 15:00 GMT. 


    “We do not expect any change to BoC policy which should keep the focus centered around the Bank’s messaging and updated forecasts in the July MPR. The latter will be key to the overall tone and we expect the Bank’s central scenario to project a contraction of roughly 6.0% in 2020 with the economy returning to pre-COVID levels around the end of next year. The statement should continue to emphasize heightened uncertainty and a widening output gap that will weigh on inflation. While we expect the Bank to maintain its messaging that LSAP will continue until the recovery is well underway, there is some scope for the Bank to announce further scaling back of its smaller and less utilized liquidity programs.”


    “With negative interest rates not being seriously considered, this suggests the policy rate will remain at 0.25% for a prolonged period – perhaps two years in our view – with any additional support most likely to come through additional asset purchases. However, we don’t think there is any urgency for a policy change via this tool. there is a risk of CAD having more sensitivity than the previous meetings even if no new policy measure is announced, as investors will be looking for any hint that Macklem’s policy stance is different from the previous governor. However, we do not expect CAD’s reaction to be very pronounced or long-lived.”


    “Judging by the rough scenarios laid out in April and the data since then, the better end of BoC scenarios could imply a narrow enough output gap to be consistent with a first hike in the latter half of 2022. But expect the report to emphasize greater risks to downside. This MPR is unlikely to deliver a major rethinking of the BoC’s asset purchase program, under the grounds that if it ain’t broke, don’t fix it. But doing what it takes to keep yields in check could soon require greater weekly bond purchases, given the increases we’re seeing in the issuance calendar to meet rising government financing needs. The Bank has only set minimum purchase levels for Government of Canada bonds, so strictly speaking it doesn’t need to actually announce a higher floor to ramp up its purchases if need be. But we expect to see it use this opportunity to at least remind investors of its willingness to do so.”


    “Taking rates into negative territory does not seem to be in the plans of the central bank, and we therefore believe rates will remain unchanged this week. We don’t expect any change to the asset purchase program either, with the Bank likely to reaffirm that large scale asset purchases will continue “until the economic recovery is well underway”. At some point in the future as the economic outlook become clearer, Macklem and the Bank will need to provide more guidance on the policy rate. We expect this to come in the form of explicit forward guidance, likely in the fall.”

    RBC Economics

    “Central Bank Governor Macklem’s first Monetary Policy Report is expected to provide a ‘central scenario’ outlook. This comes after policymakers opted to show just a range of (all-bad) future possibilities in the April report. The BoC’s Q2 Business Outlook Survey highlighted some of the challenges expected once the initial rebound dims. Businesses were clearly concerned that demand would be slow to recover, and cut investment and hiring plans in response. And some form of containment measures are likely to remain for the foreseeable future. Our own current projection has GDP still 5.2% below its year-ago level in Q4 2020, and not fully recovered to pre-shock levels until beyond 2021. That demand shortfall will keep monetary policymakers focused on downside more than upside risks to inflation, and should reinforce expectations the central bank will continue to provide as much liquidity as necessary to ensure interest rates remain low and financial markets continue to function well. On that front, continued narrowing in credit spreads from April highs should provide reassurance that exceptional monetary policy interventions have been working (and also argue that additional significant measures are not needed at this point.)”


    “BoC is expected to keep rates unchanged and retain its weekly bond purchases of CAD 5 billion. The July meeting will also feature an updated Monetary Policy Report to serve as BoC’s base case for activity this year. Inflation estimates will likely show inflation below the 2% target in 2020 and into next year.”


    “We expect the Bank of Canada to leave the policy rate unchanged at 0.25%. This is fully expected by both analysts (Bloomberg survey) and traders (CAD OIS). We expect the policy rate to remain at 0.25% at least through 2020 and 2021. In light of the plan to issue CAD 400 billion this year (more than triple last year), we may see an upsizing of the BoC’s asset purchase programme but don’t expect any fireworks in terms of market reaction. In fact, if we don’t see an upsizing, or at least a nod to potential upsizing, then this would likely trigger a larger reaction. USD/CAD is still primarily at the mercy of equities in line with the general ‘risk on, risk off’ (RoRo) dynamic driving price action. USD/CAD trading so far in Q3 feels similar to the range-bound nature of early Q2, although we are of course five big figures lower this time around.”


    “Both Westpac and the market expect the BoC to keep rates at the lower bound (0.25%) in the face of COVID headwinds.”

    Credit Suisse

    “Any assertion suggesting a more open mind towards easing further to 0% and below would represent a major dovish surprise, as Canada currently has the highest forward OIS rate across G10. Our bias is to expect the BoC to want to retain full optionality on the composition and timing of purchases, and as such would not expect this meeting to bring a stated end date for asset purchases. Any temporal deadline, especially if in 2021, would also represent an upset compared to market expectations, which are set for close to one 25bp hike in the first half of 2022. An increase in the nominal weekly purchase amount however is a distinct possibility, in the light of the government’s increased issuance schedule, and it would represent a dovish development overall. One of the measures discussed in the press is the possible introduction of a yield curve control type framework, along the lines of 3-year government bond yield target. While we do not deem such an outcome as completely unlikely, we point out that it might be a premature measure, with front-end yields still pricing in hikes 18 months out. We suspect that other dovish steps would likely precede such policy decision. Today’s rate decision will also feature a monetary policy report. While normally this would attract a certain amount of attention, we suspect that curiosity about the new Governor, combined with the highly uncertain nature of the economic outlook (and therefore healthy scepticism of any sort of medium-term economic forecast), might result in reduced market focus this time.”


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