Highlights of the Bank of Canada decision


  • Rates held at 0.25%, as expected
  • Pace of QE is now $2 billion per week from $3 billion ($1B taper, as expected)
  • Taper reflects progress towards recovery and increased confidence in the strength of the Canadian economic outlook
  • Canadian economy still has considerable excess capacity and that the recovery continues to require extraordinary policy support
  • Inflation will likely stay at or above 3% for remainder of 2021
  • Downside risks have diminished but a full and inclusive recovery will take time
  • Significant labor market slack remains
  • Continues to see output gap closing in H2 2022 though notes high uncertainty
  • Output gap about -3.0-2.0%, unchanged from April MPR range

USD/CAD initially fell to 1.2425 but has jumped to 1.2495 afterwards. The market may have been looking for something more hawkish, especially in the aftermath of the RBNZ earlier. The output gap closing is somewhat of a signal on the timing for rate hikes. The CAD bulls hoped that would be pulled forward.

One caveat to that is that the BOC notes that "potential output growth is assumed to average about 1.8 percent per year over 2021-23, approximately 0.2 percentage points higher than estimated in April. This change reflects stronger expected investment and less labour market scarring." So while growth and inflation forecast are higher, the output gap doesn't close sooner because of higher potential.

New forecasts:

  • Projects 6.0% GDP vs 6.5% in April
  • Sees 2022 at 4.6% vs 3.7% in April
  • Q2 GDP seen at 2.0% vs 3.5% in April
  • Q3 seen at +7.3%
  • 2021 US growth seen at 6.6% vs 7.0% in April
  • 2022 US growth seen at 5.1% vs 4.1% in April
  • 2023 US growth seen at 1.8% vs 1.3% in April
Projections show GDP will be about 0.75% higher but the end of both 2022 and 2023 than previously. That's not reflected in more-hawkish commentary.

The BOC said the changes reflect surveys that show Canadians plan to spend 20% of the extra savings they accumulated during the pandemic. How that develops is the major swing factor for Canadian and global growth.

I wrote yesterday about how the WWII experience suggests it wont' be spent.