BOC held firm but delivered a cautiously optimistic message
The loonie recovered slightly after the BOC meeting. As widely expected, policymakers left the overnight rate unchanged at 0.25% and QE purchases at CAD 2 billion / week. Still, they remained cautiously optimistic on the medium-term economic outlook, despite disappointing GDP data in 2Q21 and July. We expect the central bank to continue reducing the quantitative easing program to C $ 1 billion / week at the October meeting.
The central bank attributed the economic contraction in 2Q21 to supply chain disruption and housing market normalization. However, it highlighted the strong growth in domestic demand (> + 3%). Interestingly, he didn’t mention the surprising drop in the GDP flash reading for July. Maintaining an optimistic tone, the BOC continued to “expect the economy to strengthen in the second half of 2021, although the fourth wave of COVID-19 infections and ongoing bottlenecks may weigh in on recovery ”.
Regarding inflation, policymakers have embraced the idea that the recent strength was due to “temporary factors” which should prove to be “transitory”. They reiterated that the “persistence and magnitude” of these factors remain “uncertain” and will be “closely watched”. Members also recognized moderate wage increases, well anchored medium-term inflation expectations and the recent upturn in core inflation. We believe the benchmarks reflect that members are less certain of the inflation outlook now than before.
All monetary policy tools have remained unchanged, due to disappointing GDP data, the resurgence of the pandemic and the upcoming elections. Still, a cautiously optimistic BOC suggests tapering would resume unless the situation worsens. We expect QE purchases to be cut to C $ 1 billion / week in October, with the first rate hike coming in late 2022.