BoC: Not Looking For a Change in Policy

Markets await the Bank of Canada’s rate decision today, Wednesday, with market expectations that the central bank will remain unchanged and maintain rates at current low levels. However, restrictions are limiting the Bank of Canada’s movements, the first of which is the delta mutant of the Coronavirus and the rapid spread of infection in the United States and Canada.

” “We expect the BoC to remain on hold with the policy rate at 0.25% and with bond purchases at CAD2 B per week. Despite high inflation, the economy is still too weak to withdraw stimulus, and the US Fed is providing room to wait. A Federal Election on 20 September may be one more consideration to wait. A potentially dovish tone to the statement suggests idiosyncratic downside risks to the loonie as relative monetary policy drivers remain alive and well. Still, CAD will continue to be influenced by terms of trade developments (i.e. commodity prices) and global risk appetite, both of which have rebounded of late on expectations that Fed accommodation will persist as US data have softened. We see limits to this. Per our recent forecast revision, we expect USD/CAD at 1.30 at end-year.” BofA reported.

The Q2 GDP reading and Canadian growth are vital factors in analysts’ bias towards no policy changes. The Canadian economy contracted by -1.1%, which is much worse than the annual reading at 2.5% compared to the same period last year. This indicates that the economy is still weak and does not allow for a tapering in asset purchases of 2 billion per week for the time being. The decision to cut purchases to $2 billion from $3 billion last July is not expected to be repeated while the Canadian economy suffers.

The jobs print was a mixed picture but tilted to the bullish side. The headline figure came above expectations at 230K and the unemployment rate at 7.9%, but this was down on the prior reading of 8.2%.