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Goldman: BoC On Hold This Week But Still Expect Final 25bp Hike In October

CANADA
  • Goldman Sachs note that the data flow in Canada since the BoC’s last meeting has been mixed. Monthly activity indicators have continued to moderate and quarterly real GDP contracted in Q2, but wage and price inflation have shown little-to-no progress since the July decision.
  • They see the BoC on hold on Wednesday owing to the Q2 real GDP contraction and a 0.5pp cumulative increase in the unemployment rate since April, but they see the changes of a hike as "somewhat higher than the 3bp currently priced given the strong July inflation data and the experience of the spring conditional pause."
  • GS "continue to forecast the BoC to deliver a final 25bp hike in October because we expect activity to firm up in Q3 and inflation (and shelter inflation in particular) will remain too high."
  • In the upcoming statement, they will look "signals of whether the BoC discounts the Q2 GDP contraction as mostly reflecting one-off factors that are unlikely to repeat, as well as any guidance on the relative importance of activity and inflation in the policy reaction function moving forward."
  • More broadly they expect the statement "to slightly soften the characterization of demand and the labor market, to reiterate concerns around inflation stalling out above 2%, and to signal a clear hawkish bias to lean against an excessive easing of financial conditions"
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