Wednesday’s Bank of Canada policy decision fell broadly in line with both our own and consensus expectations.
That is, the Bank balanced a slip in near-term economic data with an improving external backdrop and growth outlook in order to hold policy and maintain the projections generated in April’s Monetary Policy Report. The Bank highlighted the underwhelming Q1 growth data but dug beneath the headline number to find sources of optimism in rising confidence and resilient household spending in order to maintain the view that the output gap would be closed in H2 2022.
For the loonie, today’s meeting was a relatively damp event. The emphasis is now on how the economy evolves over the five weeks until the July 14th meeting, where we still expect the BoC to taper QE purchases by a further C$1bn.
Near-term economic data over the next month should be supported by marginal reopening in major provinces, thus keeping the BoC on track to taper policy at a rate of C$1bn at every other meeting where fresh projections are released. For CAD volatility in the coming 24 hours, we flag developments in US fixed income markets, US crude inventory data, and tomorrow’s US CPI data as larger drivers than today’s BoC decision. Meanwhile, on the domestic economic front, Deputy Governor Lane’s economic progress report tomorrow will give markets a better understanding as to why the BoC still views developments as broadly in line with April’s forecasts.
Loonie unfazed by placeholder BoC meeting
Author: Simon Harvey, Senior FX Market Analyst