MNI STATE OF PLAY: BOC Seen Tapering QE on Vaccine Rollout

Canada's central bank is expected to reduce weekly bond purchases to CAD2 billion from CAD3 billion on Wednesday as mass vaccinations deliver a lasting re-opening of the economy, while transitory inflation pressures allow Governor Tiff Macklem to stick with guidance for holding a 0.25% interest rate until the second half of next year.

A potential for the solid second-half rebound the Bank of Canada has projected is becoming the dominant story as a clear majority of people have their first dose of Covid-19 vaccine, though policy makers may also note risks from variants of the virus and some weakness in the second quarter during lockdowns.

The expected taper would be the BOC's third from last year's original pace of at least CAD5 billion a week, and analysts at RBC say this one will come without any move to extend the maturity of asset purchases as was the case in one earlier round. The decision at 10am EST and press conference afterwards will be watched for indications on whether the BOC could downshift later this year to a CAD1 billion pace in line with plans to stabilize the balance sheet by reinvesting maturing assets.

Policy makers at their June decision said tapering depends on the "strength and durability of the recovery," a key phrase to watch for in this week's meeting. The reduction to CAD2 billion is expected by 12 of 13 economists surveyed by MNI, and an unchanged interest rate in all 16 responses.

Inflation forecasts may be boosted a bit in the near term to reflect the re-opening and a jump in oil prices, without changing the Bank's longer view that slack will hold down prices into next year. The BOC has said CPI will be around 3% in the next few months and later slow to 2%, while May's 3.6% pace was the fastest in a decade.

RESISTING MORE HAWKISH STANCE

"We expect the BoC to lean heavily against taking a more hawkish stance in the face of inflationary pressures," Desjardins chief economist Jimmy Jean wrote in a research note. Other economists also agree it's too soon for the BOC to signal it could again advance its guidance about lifting interest rates from the current record low, something it did in April by shifting from sometime in 2023 to the second half of next year.

For one thing, the economy remains half a million jobs short of where it could have been absent the pandemic, and June's gain of more than 200,000 jobs may not be a sustainable pace because it reflected the end of some major lockdowns.

Even with those shutdowns in April and May, economists say GDP probably still grew at a 3% annualized pace in the second quarter, close to the BOC's April prediction of 3.5%. That gap is trivial compared with fears of shrinking output around the start of the year, and GDP is now within a percentage point of its pre-pandemic level. If anything, the BOC's stance remains more hawkish than the Fed or ECB and there's no sign Macklem will dial back his relative optimism, especially with Canada's dollar relatively well behaved.

Along with a reference to the rebound's strength determining QE, it will be key to watch how Macklem adjusts his view that "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."