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BOC Preview: Caution over Pandemic Uncertainty while acknowledging Better-than-Projected Growth

The BOC will leave its policy rate and the size of the QE program unchanged at this week’s meeting. While there will be no press conference and updated economic projections will not be released until April, policymakers will address the upbeat economic data released in the last meeting. Yet, they would have to maintain a relative dovish tone as the recent increase bond yields might have tightened the market conditions.

On the macroeconomic outlook, the BOC should acknowledge the better-than-expected developments since the January meeting. Canada’s GDP growth eased to an annualized rate of +9.6% q/q in 4Q20. Yet, this came in better than consensus of +7.5% and actually doubled BOC’s forecast. Meanwhile, market expectations of GDP growth in 1Q21 is much more optimistic than the central bank’s forecast of -2.5%.

In January, headline CPI accelerated to +1% y/y, from December’s +0.7%. This came in slightly better than consensus of +0.9%. BOC’s preferred inflation gauges averaged at +1.8%, up from +1.7% in December. Core CPI also added +0.1 ppt to 1.6%
However, policymakers would refrain from over hawkish, but caution over the uncertainty of the pandemic developments and possible resurgence of infected cases. It could warn of the disappointing employment report in January. The job market lost -212.8K positions in January, compared with consensus of -40K. The unemployment rate jumped to 9.4% from 8.8%. These should point to the stance that an expansionary monetary policy remains necessary.

The BOC will leave the overnight rate at the effective lower bound of 0.25%. The size of asset purchases will also stay unchanged at CAD4B/week. However, there have been increasing speculations that the central bank will reduce the size to CAD3B/week at the April meeting. We will see if there will be hints of such as move in the policy statement this month.