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POV: Economic Optimism To Spur Third Tapering

BOC
Consensus: The Bank of Canada will keep its target rate on hold at 0.25% Wednesday, while reducing weekly bond purchases CAD1B to CAD2B/week is widely expected. Forward guidance: unwilling to spook markets, the Bank is widely expected to remain at the current lower bound of 0.25 until mid- to second half of 2022.
  • Dovish risk:Economic improvement and inflationary factors to this point deemed transitory, perhaps staying the BoC's hand in tapering weekly bond purchases. Continued fiscal support, swift vaccination and careful approach to reopening has helped economic rebound, but there's still enough slack in the economy to warrant a gradual approach to normalization.
  • Hawkish risk: On the flipside, if the economic rebound is deemed stronger than expected, there is a chance the BOC taps the breaks a little harder, perhaps by moving forward timing of of the output gap closing or tapering more than the anticipated C$1B.
    • Scotiabank posited "reducing purchases down to, say, $1 billion in one swoop at this meeting would likely set up expectations for an end to the purchase program, perhaps at the September meeting, with pulled-forward expectations for a reinvestment phase and rate hikes. That's not inconceivable, but would signal a greater rush to exit than Governor Macklem's guidance has tended to indicate to date."
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