Preview: Bank of Canada could hint at higher inflation
What to watch for in the June 9, 2021 Bank of Canada rate decision
The Bank of Canada interest rate decision is at 1400 GMT (10 am ET) on Wednesday. There's universal consensus that the overnight rate will be left at 0.25% and there is no press conference afterwards.
The only communication we will be getting is the press release and given everything that's happened since we last heard from the BOC, expectations for any kind of monetary shift are low.
Or as Bank of America puts it:
"We expect the Bank of Canada (BoC) to remain on hold on 9 June, waiting for the economy to get out of its current rough patch and for inflation to eventually subside. That is, we do not expect the Bank to change either its policy rate or its pace of bond purchases at this time," analyst at Bank of America notes."All else unchanged, we believe it will be difficult for this meeting to serve as a catalyst for further CAD strength, as turned out to be the case with the April meeting. With risks skewed toward a less-hawkish message, we see CAD idiosyncratic risks on the day as accordingly being tilted to the downside, as with CA yields," BofA writes.
The message there is that someone, somewhere is expecting a hawkish surprise because that's what the Bank of Canada did last time. I'm not so sure I follow that line of thinking, because just about everything I can find is saying this meeting is a placeholder.
The main reason why nearly no one expects another hawkish surprise is because the economy has undershot the BOC's April projections because of harsh lockdowns in Canada's largest provinces.
That said, just about everyone is expecting a rapid snap back. Restrictions in Ontario ease on Friday and given that cases have fallen dramatically there and high vaccinations rates, there is plenty of confidence that the good times will return.
So for Governor Tiff Macklem and the BOC, it's really just a matter of deciding to be pre-emptive or wait and see. Arguably, they were already pre-emptive in the April 21 decision, so now is as good a time as ever to watch and wait.
For now, the BOC forecast for 2021 is 6.5% and that compares to the 6.3% consensus. But it flips next year with the BOC at 3.25% and economists at 4.0%. In any case, those numbers are all close enough not to bother anyone until we get more economic data.
On the data front, here are some highlights since the BOC met:
- Canada May net change in employment -68.0K versus -25.0K estimate
- Canada March GDP +1.1% m/m vs +1.0% expected (April prelim -0.8%)
- Canada March retail sales +3.6% vs +2.3% expected
- Canada CPI for April 0.5% m/m versus 0.2% estimate
- Canada April housing starts 268.6K vs 290.0K expected
- Canada April net change in employment -207.1K versus -150K estimate
Those are split 3-3 for more-hawkish/more-dovish but there's a widespread belief that April and May data will be soft.
One spot I will be watching in the statement is the communication on inflation.
"Over the next few months, inflation is expected to rise temporarily to around the top of the 1-3 percent inflation-control range," is the current line.
I think central bankers are now more inclined to believe that price hikes reach 4%. The BOC could wait and see but there may be some value in hinting at a higher number now, which maintaining the rest of the associated language that says it will fall back in H2.
If they do make a chance, it could lead to a kneerjerk higher in the loonie.
In the bigger picture, the market is trying to figure out when the Bank of Canada will hike rates. They've indicated the output gap will close in the second half of 2022. Normally, that would call for a hike around six months earlier but -- in line with other central banks -- they're likely to be more patient this time and that could mean waiting until early 2023.
In any case, that's plenty of time for the BOC to watch and wait. At some point, they will accelerate the taper. That will be the next domino to fall and is likely to come as soon as next month but the BOC can signal that closer to the July 14 rate decision, which will come with a new set of forecasts.
Overall, I see some hawkish risks (either a nod to higher inflation or economic resilience) but there's not a great setup for a trade into the event, especially with support at 1.2000 continuing to hold.
Also note that BOC Deputy Governor Tim Lane will speak Thursday and could tweak the message or help to guide markets if the BOC isn't happy with the reaction.