MNI PREVIEW: BOC To Hold At 0.25% In Macklem's 1st Full Meet

--Partial Economic Forecast May Set Tone, Big QE Shift Unlikely

By Greg Quinn

     OTTAWA (MNI) - The Bank of Canada will likely hold its key lending rate at

a record low 0.25% Wednesday, leaving the focus of new Governor Tiff Macklem's

first full decision on whether he resets views of the pandemic recovery in

partially-reinstated forecasts or gives clues as to the pace of bond buying.

     The BOC will publish a "central planning scenario" restoring part of the

economic forecasts dropped in April, and investors say that may contain more

clues than the rate decision itself on future policy moves. The biggest

revelation could be projecting how inflation gets back to a 2% target over the

BOC's two-year horizon, or more clarity on QE plans.

     All 14 economists polled by MNI see the rate unchanged. Macklem was an

observer at the last meeting in June and endorsed the view that rates are at a

lower bound, and the plan to buy at least CAD5 billion a week of federal bonds

until the recovery is well underway.

     This meeting is likely too soon for the BOC to set the stage for using

other stimulus tools such as forward guidance, especially with signs the economy

already hit bottom in 2Q and employment has started recovering. Another option

down the road may be capping the 5-year bond yield that benchmarks most mortgage

and corporate lending.

     "The Bank might eventually consider yield curve control but, with bond

yields already very low, there is little need for such a policy yet," Stephen

Brown of Capital Economics wrote in a report.

     Macklem was a BOC deputy under Mark Carney when they laid out a

"conditional commitment" to keep rates low during the global financial crisis.

This time around -- as with a debate at the Fed -- forward guidance is more

difficult because of major swings still being seen in major economic reports.

Canadian consumer confidence was the worst on record in the second quarter with

declines in all but one of 13 major questions, an MNI analysis of BOC data

found.

     His hands may be full at the press conference explaining how the record

CAD529 billion of QE initially deployed to stabilize markets will be applied to

economic firefighting. The government's CAD343 billion deficit announced last

week raises the potential of the BOC accelerating bond purchases Wednesday,

which would renew questions about maintaining the BOC's independence.

     The economic recovery is likely to be a long fight, with no one predicting

when rates will rise again or QE tapered off. Macklem's first public remarks

since taking over from Stephen Poloz stressed the economy faces a long and

difficult comeback from the "deep hole" created by the pandemic, and that

message should be loud and clear again this week.

     Even if a vaccine is found soon, Macklem says Canada faces a "double

whammy" from the global crash in prices for crude oil is a key export. GDP

probably shrank by a record 35% at an annualized rate in 2Q, and unemployment

including people in limbo after Covid layoffs is over 15%, unlike anything

outside of the 1930s or postwar demobilization.

     His first speech said that QE alone "can also send a signal that our policy

interest rate is likely to remain low for a long period." Any similar turn of

phrase Wednesday may cement views of long-lasting stimulus.

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

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