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UBS: BoC Heading To Neutral, But Not Very Restrictive

CANADA
  • UBS expect the Bank willhike 50bps to 1.5% as Dep Gov Gravelle said recently that inflation has surprised the Bank’s projections to the upside and UBS note that Q1 GDP growth is tracking close to 5% annualised compared to the BoC’s forecast of 3% in April (written prior to today's GDP miss).
  • The statement should retain tough talk on inflation, citing the risk that expectations of elevated inflation could become entrenched but will also likely mention the deterioration of the global backdrop.
  • A message from the BoC over the last several weeks is that there is a strong consensus that the policy rate should move to the range of neutral, but low conviction on what should be done afterwards.
  • Gov Macklem and Dep Gov Gravelle said that the hiking cycle could pause if demand slows abruptly or if inflation pressures moderate. UBS think that by the October meeting both of these situations could materialize. They therefore expect another 50bp in July which would bring the policy rate to the neutral range before a 25bp in September before pausing in October.
  • Monetary policy is unlikely to move to a very restrictive stance though with Senior Dep Gov Rogers implying they do not need to actually see inflation coming down aggressively in order to pause plus the fact the Canadian consumer could be more sensitive to higher interest rates than in the US given higher levels of leverage.
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