MNI STATE OF PLAY: BOC Seen Holding CAD4B/Wk QE and 0.25% Rate

The Bank of Canada on Wednesday will likely press on with at least CAD4 billion a week of asset purchases and a 0.25% interest rate, as a second wave of the pandemic stalls the economy and pushes back the rebound expected later this year when vaccines are widely available.

All 14 economists surveyed by MNI predict no change in the record low rate, and eight of nine see QE steady as well. The country has gone back to stricter lockdowns after holiday gatherings triggered record Covid-19 caseloads, backing Governor Tiff Macklem's hesitancy to embrace near-term optimism about vaccine breakthroughs.

With no growth or a contraction expected this quarter, there will likely be no clear BOC message about progress towards its goal of ensuring the economic rebound is well underway before ending with QE.

Inflation remains at 1%, the bottom end of the BOC's tolerance band in its single-target regime of keeping prices running at 2%. The stronger Canadian dollar that Macklem has drawn attention to at the last two decisions has also appreciated another cent to CAD1.28 against the greenback since the start of December.

RESILIENCE MEANS APRIL TAPER

Sources have told MNI that while the BOC may now assume most people get vaccinated sooner than its October estimate of mid-2022, policy makers may also wait before fully upgrading growth forecasts.

The BOC's October Monetary Policy Report predicted 4.2% growth in 2021following a 5.7% drop this year, and some market economists see the BOC moving its 2021 forecast more toward 5%.

On the plus side, the economy was stronger than expected in the fourth quarter, though with GDP still 4% below the pre-pandemic mark. While about a million workers are still out or work or on reduced hours because of the pandemic, that's also well below the peak of 5.5 million.

Finally, with the government promising most of the nation will receive vaccines by around September, households could spend the more than CAD50 billion of cash they saved from relief payouts.

Given such markers of progress, economists surveyed by MNI say the BOC will taper to CAD3 billion in April. Some investors also see the BOC needing to avoid frictions created with the central bank on track to own half the government bond market this year.

KEEPING STIMULUS IN PLACE

"While highlighting an economic acceleration after mass vaccination starts in the spring," CIBC chief economist Avery Shenfeld wrote in a research note, "the overriding message will be that stimulus will be warranted for a considerable period ahead."

Macklem has said he doesn't see the conditions for a rate increase -- inflation solidly back at 2% and economic slack used up -- until into 2023. A small minority of market watchers say not to rule out the chance Macklem will follow through on remarks last month that it could beneficial to cut the policy rate while still leaving it above zero.

Still, with business investment lagging for years even with record low rates, the pandemic dominating the outlook, and the government providing the biggest fiscal boost among major economies, it's unclear what good another rate cut would do.

The decision is due at 10 a.m. Eastern time, comes with an updated quarterly economic forecast, and is followed by a webcast press conference at 11 a.m.