After the adjustment in asset purchases in October, we expect BOC to keep the powder dry this week, at its last meeting in the year. Policymakers will caution about the rising number of coronavirus cases and economic impacts of tighter restrictive measures, while noting positive news about vaccine. The central bank will reiterate that accommodative monetary policies should remain in place as slack capacity will only be fully absorbed by 2023.
Canada’s economy since the last meeting has continued to improve. GDP expanded +40.5% q/q (annualized) in 3Q20, following a -38.1% contraction in the prior quarter. This, however, came in weaker than consensus of +47.6%. From a year ago, the economy dropped -5.2%, compared with a -12.5% decline in the second quarter. On inflation, headline CPI improved to +0.7% y/y in October from +0.5% a month ago, beating consensus of +0.4%. Core CPI steadied at +1%. BOC’s preferred inflation gauges averaged at +1.8%, up slightly from +1.7% in September. The unemployment rate slipped -0.4 ppt to 8.5% in November, the number of payrolls increased +62.1K. While the addition came in less than October’s 83.6K, it was more than consensus of 20K. Average hourly wage gained +4.84% y/y, easing from +5.25% in October. On the policy front, BOC announced in October to gradually reduce asset purchases to at least CAD4B/week, from CAD5B/week previously. The program will continue “until the recovery is well underway”. We believe this will remain intact at this week’s meeting. BOC is also expected to leave the policy rate unchanged at the effective lower bound of 0.25% at the upcoming meeting. Due to BOC’s reluctance to adopt negative rate, the current level of interest rate will likely stay unchanged for some years. Indeed, BOC indicated at the previous meeting that a rate hike will unlikely happen until “into 2023”. We also expect BOC to maintain the forward guidance that the policy rate will stay unchanged at the effective lower bound “until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved”.