MNI PREVIEW: BOC Set To Hold Rates and QE on 2nd Covid Wave

The Bank of Canada will likely affirm Wednesday that interest rates will stay near zero for years and press ahead with QE, as the economy's transition to what policymakers had called a long recuperation is threatened by a second wave of Covid-19.

Governor Tiff Macklem has pledged to keep up federal bond purchases of at least CAD5 billion a week until the economic recovery is well underway, and downside risks are rising with a second wave of the virus in Toronto, Montreal and Ottawa. Every economist in an MNI survey sees the official policy rate remaining at 0.25% in a decision due at 10am EST, and most see the pace of QE remaining unchanged. Macklem is also holding a press conference at 11am.

New health shutdowns make it even harder to hire back the nearly three-quarters of a million people laid off in the spring when the pandemic first hit Canada, and for firms to make new investments. While pressure for more monetary stimulus is less than in the U.S. because of generous government relief payouts, business groups warn of a wall of bankruptcies and a million households face the end of a six-month program to defer debt payments.

Fourth-quarter growth is also seen sliding to around a 3% annualized pace that does little to curb the slack holding inflation at 0.5%. That will likely take the shine off a likely upgrade of the BOC's third quarter GDP growth estimate to about a 40% annualized pace, following a record decline of the same magnitude in the second quarter.

The BOC's in July forecast unchanged rates until inflation is sustainably back on its 2% target and didn't show price gains at that mark through 2022. Officials have also said QE will remain until the recovery is well underway, and establishing a solid growth trend seems far away in part because Statistics Canada doesn't report third-quarter GDP until Dec. 1.

"We expect the policy statement to maintain a cautious tone, reflecting the Bank's view for a drawn-out recovery and uncertainty around second wave of COVID, while noting that the recovery to date has been stronger than anticipated and flagging the supportive role of fiscal stimulus," according to a TD Bank economist report.

Strategists at National Bank Financial and CIBC say the BOC could tweak or scale back federal bond purchases to avoid taking over half the market and squeezing liquidity. Seven of 10 economists in a C.D. Howe Institute shadow council said QE should remain at the same pace, with the other three saying it should be slowed down.

The BOC has already moved to slim some of its other asset purchase programs earlier this month. It ended programs on mortgage bonds and bankers' acceptances while scaling back repo transactions to biweekly from weekly, saying financing conditions in those markets have eased. That may further shrink a balance sheet that leveled off since hitting a record of about CAD550 billion, in line with what sources have told MNI may be a medium-term shift to calibrate purchases and put the emphasis on a more "qualitative" easing.

Another reason it's hard to pull back on QE is political. Prime Minister Justin Trudeau is running the biggest deficit among major nations tracked by the IMF and rejects the idea of presenting a formal budget or a medium-term fiscal anchor, making the future supply of new government bonds uncertain. Trudeau's Liberals also have a minority government that could face a snap election in the next few months, and any new Parliament could bring another lurch in debt sales markets find hard to digest.

Macklem last month said it was far too soon to look at any real exit strategy and that even as the economy moved into a recuperation phase "we still have a very long way to go."