June 09, 2021 | 10:47
BoC Policy Announcement—Unfazed by Third Wave
The Bank of Canada held policy rates steady and maintained their QE program at a target of $3 bln per week. The general tone of the statement was little changed from April when the BoC was shockingly upbeat. The financial market reaction was muted, with the loonie appreciating heading into the Statement.
The view on the domestic economy appears to be little changed despite the April MPR overestimating Q1 GDP growth by 1.4 ppts. Indeed, the Statement notes that Q1 GDP growth was "a robust 5.6 per cent" and that the details of the report point to "rising confidence and resilient demand." With respect to Q2, the third wave lockdowns are "dampening economic activity...largely as anticipated." Note that the April MPR was projecting 3.5% growth in Q2 GDP, while BMO's forecast currently sits at 0%, with downside risk. For those keeping score at home, that would be a nearly 5 ppt miss over two quarters if we're right.
Meantime, the medium-term outlook for growth remains very upbeat, with increasing vaccinations driving a strong second half rebound. Rising commodity prices and foreign demand are expected to lend a helping hand as well. No qualms there, but we're unlikely to have evidence of the strength of the rebound until well into Q3.
On the inflation front, there were no surprises. The Statement says that inflation has risen to the top of the 1-3% control range due to base effects and gasoline prices. The rise in the core measures is blamed on temporary factors as well. The Bank anticipates headline inflation will stay around 3% through the summer before pulling back later in the year.
On the cautious side of the ledger, the BoC continues to highlight that the labour market still has a ways to go before healing. There's also uncertainty surrounding COVID variants. The struggles of some emerging markets with the pandemic is noted as well, though that's accompanied by comments on recovery in the US and Europe.
The concluding paragraph didn't change much. It reiterates that there "remains considerable excess capacity" and that policy rates will stay at the lower bound until "economic slack is absorbed" which the April MPR said was in 2022H2. With respect to further tapering, the "assessment of the strength and durability of the recovery" will guide that decision.
The C$ barely garnered a mention yet again, with the Statement noting the recent gains and accompanying rise in commodity prices. The lack of concern here might be viewed by the market as a green light for further strength.
Key Takeaway: After turning sharply more optimistic in April, the Bank of Canada hasn't backed off at all despite two months of lockdowns for large segments of the country. The willingness of policymakers to shrug off what could be a big miss on their first half growth forecast clearly points to a hawkish bias. We had been expecting the next taper to come in October, as we'll have precious little evidence of the recovery's strength in July, but today's Statement suggests the Bank wants to act sooner rather than later.