MNI STATE OF PLAY: BOC Optimism Keeps Focus on July QE Taper

The Bank of Canada's emphasis on a strong rebound from a third wave of Covid shutdowns keeps market expectations focused on Governor Tiff Macklem tapering QE again at the next meeting in July, widening a lead over other major central banks in exiting emergency policies.

Policy makers in a decision Wednesday pointed to first-quarter GDP growth that only slightly missed its estimate and had positive details on confidence and demand. There were no mentions of potential drags from a dollar trading around the strongest since 2015 or an overheated housing market.

"With vaccinations proceeding at a faster pace, and provincial containment restrictions on an easing path over the summer, the Canadian economy is expected to rebound strongly, led by consumer spending," the Bank said.

Before the decision about half the market saw a potential taper to CAD2 billion at the July meeting that comes with a fresh economic forecast, while others saw tapering left until September or later to ensure the economy is back on track.

"The willingness of policymakers to shrug off what could be a big miss on their first half growth forecast clearly points to a hawkish bias," Benjamin Reitzes at Bank of Montreal wrote in a research note.

FOLLOW-UP SPEECH THURSDAY

The BOC agrees with other central banks that lot of stimulus must remain in place to tackle a buildup of economic slack that will hold down inflation pressures. The BOC reiterated that even inflation at the fastest pace in a decade of 3.4% is linked to base effects that will fade later this year.

Conditions for a rate increase based on inflation stabilizing around the BOC's 2% target may be in place in the second half of next year, according to the decision, echoing past language. Job market weakness remains a concern beyond the Bank's single inflation mandate, with policy makers noting "the employment rate remains well below its pre-pandemic level, with low wage workers, youth and women continuing to bear the brunt of job losses."

Investors should watch for a speech Thursday at 1pm EST by Deputy Governor Tim Lane followed by a press conference for additional clues. Deputy Governor Paul Beaudry has an academic lecture on Friday, but that is unlikely to be focused on market developments.