What to expect from the central bank’s rate meeting on Wednesday?

On Wednesday, the central bank is expected to follow its monetary policy’s trajectory, based on the progress of vaccinations and growing consumer prices compared to weak economic data from the recent lockdowns.

Economists predict no changes to the Bank of Canada government bond-buying program or its decisions on rate increases. As you know, the BoC’s key lending rate has been at 0.25% since March 2020, and it has promised not to raise it until at least the second half of 2022.

This week’s rate meeting will be held a week after Statistics Canada data pointed to the country’s weak economic recovery in April and May amid new COVID-19 restrictions.

According to preliminary estimates, April showed the first decline of real GDP in a year – by 0.8%. Canada lost 207,100 jobs in April and a 68,000 jobs later in May. Statistics Canada says the annual GDP growth was 5.6% in Q1, which is lower than 7% expected by the BoC.

“Although the outlook is still quite positive, the events of the previous year suggest that the central bank will keep a cautious approach to reducing the stimulus”, – Benjamin Reitzes from BMO Capital Markets says.

“The combination of a significant forecast mistake and growing Canadian dollar only increase the possibility that the Bank’s statement will be a balanced mix of optimism and caution,” – he believes.

The BoC introduced several changes to the monetary policy at its last rate meeting in April. It reduced the size of its government bond-buying program from $4-billion to $3-billion a week, and changed the timing of a potential interest rate increase from 2023 to the second half of 2022. The BoC has outpaced other major central banks in cutting the emergency stimulus implemented because of the pandemic.

“Tiff Macklem and his team might as well take the week off,” – CIBC World Markets chief economist Avery Shenfeld noted.

“It’s definitely too early to even think about a rate increase. The BoC’s bond purchases are already being reduced. More steps in this direction will not become a significant change and will not cause a strong market reaction. The decisions on rates and reducing the stimulus are made mostly on autopilot this year,” – he says.

Analysts will keep an eye on the Bank’s comments concerning the loonie. The Canadian dollar has been outpacing other Group of 10 currencies this year, supported by high commodity prices and Canada’s relatively aggressive monetary policy.

Although high commodity prices are great for many exporters, there’s a possibility that the strong dollar may hurt non-commodity exporters. According to Tiff Macklem, the strength of the loonie presents a threat to the bank’s economic growth and inflation forecasts. Last week, Mr. Shenfeld and CIBC senior economist Royce Mendes noted the Bank had to be stricter in its warnings.

“Reduce the calming rhetoric that the loonie’s growth is in line with fundamentals, and remind markets directly that as a drag on non-resource exports and inflation, the loonie’s growth will push the rate hike further on the timeline,” – they believe.