BoC Preview: Forecasts from seven major banks, asset purchases to be cut

The Bank of Canada (BoC) will announce its monetary policy decisions at 14:00 GMT and as we get closer to the release time, here are the expectations as forecast by the economists and researchers of seven major banks, regarding the upcoming announcement. The BoC is widely expected to leave its policy rate unchanged at 0.25% but a reduction in asset purchases could help the CAD stay resilient against its American counterpart.

ING

“The BoC is set to taper QE purchases further to CAD1 B per week with the programme likely concluded in December as the market increasingly prices in 2022 rate hikes. We expect a neutral impact on CAD, which seems to have most of the positives in the price and may experience corrections in the near-term.” 

RBC Economics

“Inflation concerns will likely be front-and-center. The BoC will point to persistent supply chain constraints as a drag on near-term growth and as a contributor to rising consumer prices. The key question is how long inflation will remain above the bank’s 1% to 3% target range. Prices aren’t expected to reverse recent increases. The BoC will likely point to its Q3 business and consumer expectations surveys in which respondents anticipated moderation in price growth over the medium-term. There’s little domestic monetary policy can do to counter global supply chain challenges and rising commodity prices. But the strengthening jobs market and inflation numbers suggest the economy is sturdy enough for the central bank to continue reducing monthly asset purchases. The BoC has said it will not hike interest rates until economic slack has been absorbed. Weaker GDP data in the near-term suggests that could happen later than previously thought. However, given a tightening labour market and higher inflation, the BoC will likely hold its position that rates will rise in the second half of next year. If anything, the risk is tilted toward rate increases kicking off even earlier.”

TDS

“We expect the BoC to argue that the inflation surge is largely transitory, and to hold forward guidance for the overnight rate unchanged with rate hikes expected in 2022H2. We also look for the BoC to announce the end of its QE program in its current guise, with the reinvestment phase beginning in November.” 

NBF

“We’re not looking for a significant change in tone, though we will likely get an acknowledgment of stronger-than-expected price hikes to date and potential upside risks ahead. A revised economic outlook will also be presented in the Bank’s new Monetary Policy Report. With growth stumbling recently, a markdown to the GDP outlook seems all but certain. The Bank’s inflation projections, on the other hand, will likely be tweaked upward. That said, given its assessment that there is slack still in the economy (including in labour markets), the Bank should project inflation falling back towards its target next year. As for policy changes, we’re looking for the central bank to taper its QE program once again, providing additional guidance on the so-called reinvestment phase that will follow. Finally, there is uncertainty on how the Bank will manage its policy rate forward guidance, but based on recent Tiff Macklem communications, we continue to expect the central bank to flag lift-off in the second half of 2022.”

CIBC

“The BoC will mark down its 2021 growth forecast (likely implying a slightly longer wait to close the output gap), raise its near-term inflation forecasts, keep rates on hold, and announce a cut in its secondary market bond purchases to CAD1 B per week. As our rates strategist Ian Pollick pointed out, that’s not a low enough pace for bond-buying to mark the start of the “reinvestment phase”, since adding in purchases in the primary market, the BoC’s holdings of Government of Canada bonds will still be climbing.”

Citibank

“This week’s BoC meeting is probably not the time for a change in the policy stance as the spread between actual and potential growth (the output gap) is unlikely to close any earlier than the current guidance for H2-2022. This guidance remaining unchanged could be a disappointment to markets pricing over 30bp of rate hikes by the April 2022 meeting. Citi analysts however expect the BoC to further reduce the pace of asset purchases to CAD1 B per week.”

BMO

“The three main things to watch for are (among the many keys): Does the Bank push back on the sudden hawkish outlook for policy in the year ahead? The market is now almost fully priced for four rate hikes in 2022, while the Bank has only previously said they won’t be in a position to hike until late that year. We suspect they modestly push back. Does the Bank effectively bring an end to QE, by moving directly to the reinvestment phase? We think yes, as there simply is no justification for such extreme stimulus at this point. QE was unleashed at a time of emergency – there is no emergency now. Does the Bank significantly adjust their inflation forecast? In July, they expected headline inflation to fade to 3.5% in Q4 of this year, and all the way down to 2.0% by 2022Q4. Arithmetic tells you the first figure will go higher, and logic suggests the second one is also at risk.”