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Modest Market Reaction To BOC Statement/MPR

CANADA
GOC front-end rally trimmed (2Y sells off 1.5-2bps to -3bps on the day), USDCAD reversed some of its strength on the statement/MPR and is largely unchanged.
  • Guidance: Acknowledges moving into excess demand but otherwise unchanged, doesn't add forceful or similar: “With the economy moving into excess demand and inflation persisting well above target, the Governing Council judges that interest rates will need to rise further” with usual conditionality to achieve 2% inflation target.
  • Another tilt more hawkish on inflation expectations: “There is an increasing risk that expectations of elevated inflation could become entrenched. The Bank will use its monetary policy tools to return inflation to target and keep inflation expectations well-anchored.” From “Persistently elevated inflation is increasing the risk that longer-run inflation expectations could drift upwards”. The Bank will use its monetary policy tools to return inflation to the 2% target and keep inflation expectations well-anchored."
  • Neutral rate (from MPR): Increased 25bps, the upper end of what analysts had expected. That should imply 2-3 with midpoint 2.5%, vs the Fed median revising down a tenth from 2.5% to 2.4%. “This reflects a combination of a higher global neutral rate and a stronger outlook for potential output".
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