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Credit: Bank of Canada
Test of Canada photos Tues
MNI (Ottawa)
OTTAWA (MNI)

The Bank of Canada on Wednesday will likely signal that the economy took less damage than feared during the pandemic and press ahead with QE rather than break new ground on yield curve control, TD Securities Chief Canada Strategist and former central bank senior markets analyst Andrew Kelvin told MNI.

Reports since the July meeting suggest the economy will shrink 6% this year, less than the central bank's 7.8% estimate, Kelvin said, and markets are already on board with Governor Tiff Macklem's view that rates are on hold for around two years.

"If you look where yields are, the Bank of Canada wouldn't feel like they need to be implementing yield curve control here, but if there is a next step in monetary policy that would be that next step," Kelvin said.

It's more likely Macklem would deliver curve control in October where the one-page rate decision comes with a quarterly Monetary Policy Report, Kelvin said. Macklem's embrace of QE already offers some of what curve control would accomplish, he said.

"If I'm going to be surprised about something, the thing I'm sort of most braced for is yield curve control," Kelvin said. "I don't think the September meeting is the time to do it."

A LOT OF SLACK

Macklem in July committed to continuing his predecessor's plan to buy at least CAD5 billion a week in federal bonds, and said the 0.25% interest rate will remain in place for at least two years.

"There is still a lot of slack, so they don't need to soften their guidance, they can say things are a bit better," Kelvin said.

The BOC will keep an eye on the Fed's shift to average inflation targeting and whether any new U.S. slowdown late this year could hurt Canada, Kelvin said. Canada sends 75% of exports to the U.S. and the local dollar can be sensitive to shifts in relative performance on price or growth trends.

"Average inflation targeting in a lot of ways isn't that different from what they have pursued," at the BOC, he said. "Even if it wasn't explicitly in their mandate, the Bank they really emphasized that they had a flexible inflation target." The BOC in 2021 is due to renew a five-year agreement with the government to target 2% inflation.

MNI Ottawa Bureau | +1 613-314-9647 | greg.quinn@marketnews.com
MNI Ottawa Bureau | +1 613-314-9647 | greg.quinn@marketnews.com

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