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Canada's central bank will likely stress the economy is fragile and well below potential after the successful Covid-19 re-opening, while underlining commitments to hold a 0.25% interest rate and buy at least CAD5 billion a week of federal bonds in a policy decision Wednesday.
Partial rebounds in output, jobs and exports give the Bank of Canada scope to upgrade its July "central planning scenario" for GDP to plunge 7.8% this year, market analysts predict, with BMO Capital Markets and TD Securities saying the decline may be less awful at around 6%.
For a year of unprecedented surprise actions, this meeting's backdrop is an economy stabilizing after the record 39% annualized Q2 contraction and settling into a slog back to normal amid the risk of another coronavirus wave. The BOC will hold back on optimism with unemployment above 10%, exports to the U.S. in doubt and consumer spending threatened by the government's scaling back relief checks and moving to end 6-month deferments on mortgage payments.
The BOC in July signaled frozen rates into 2023, pledging a hold until inflation was "sustainably achieved" at its 2% target and forecasting that that wouldn't happen through the end of 2022. The latest CPI figures give little scope for an upgrade, with the headline reading at 0.1% year-over-year and core rates running as low as 1.3%.
PLENTY OF MAKE-UP
"The key for the Bank of Canada will be to reinforce that policy will remain extremely accommodative for some time yet," Benjamin Reitzes, a strategist at BMO Capital Markets, wrote in a research note. Output will still be down as much as 4% by year-end, still bigger than worst of the global financial crisis, "so even with the better backdrop, there will be plenty of ground to make up in 2021, necessitating ongoing monetary policy support," he said.
The bigger job of reassessing how much spare capacity is left will have to come later, making much fine tuning of the outlook unlikely, former BOC adviser Steve Ambler told MNI. Without a change of view on the output gap, there's little reason for the central bank to shift its commitment on QE "until the recovery is well underway."
The BOC will also likely push any potential embrace of yield curve control until the October meeting that comes with a full economic forecast, former BOC senior market analyst and TD Securities Chief Canada Strategist Andrew Kelvin told MNI. With Governor Tiff Macklem ruling out negative interest rates, curve control or at least stronger QE may be needed if the economy buckles again.
Even with a strong re-opening, Macklem has stressed the economy is in a "deep hole" and also faces a headwind from the sustained downturn in Canada's energy industry.
The one-page statement is due at 10am EST Wednesday and all 11 economists surveyed by MNI expect the overnight rate target to remain unchanged. Investors may look for an upgrade to the BOC's Q3 growth estimate of 31% given in July, with several market economists seeing 40% growth instead.
Key phrases from the last statement to watch for again:
"The Bank stands ready to adjust its programs if market conditions warrant."
"The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved.."
"This QE program is making borrowing more affordable for households and businesses and will continue until the recovery is well underway."
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