BOC decision due at the top of the hour

BOC decision due at the top of the hour

Does the Bank of Canada want to fight the market, or let it run?

There are two current schools of thought in central banking. 1) Led by the Fed, the idea is to lean against higher yields but let them run, unless they run to far. 2) Fight tooth and nail against rising yields and expectations of rate hikes/inflation. The RBA, BOJ and ECB are in this camp.

The BOC finds itself in the middle. Canada would hate to hike rates before the Fed (and that's what's priced in) and is sensitive to a higher currency. The best thing for the economy right now would be to put up a big fight.

At the same time, central bankers are quickly realizing that fighting higher rates is a losing battle so I expect the BOC to follow the Fed's messaging.

Fortunately for Macklem, today's decision is a statement-only, so he won't need to be pinned down. There are also no new economic projections, so they can continue to say this key line in the statement:

"The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In our projection, this does not happen until into 2023."

The market is betting it happens sooner.

The BOC has also gone too far on QE, too fast and has to taper. That can also wait until next month but it's not a sure thing. The current pace is $4B per week. If that's tapered now, CAD will jump.

Overall though, the BOC has to take a more-constructive tone. Recent Canadian GDP and other economic data has been much better than anticipated and forecast by the central bank. The timeline for the vaccine has also been moved up and it may be available to all Canadians by the end of June.

"Growth in the first quarter of 2021 is now expected to be negative," the prior statement said.

That doesn't look to be the case with StatsCan's first estimate of January GDP at +0.5% and all signs pointing to more acceleration in the rest of the quarter as parts of the country reopen.