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BOC Stood Pat but Delivered Cautiously Optimistic Message

The loonie recovered modestly after the BOC meeting. As widely expected, policymakers left the overnight rate unchanged at 0.25% and QE purchases at CAD 2B/ week. Yet, they remained cautiously optimistic over the medium term economic outlook, despite disappointing GDP data in 2Q21 and July. We expect the central bank to continue to taper the QE program to CAD 1B/ week at the October meeting.

The central bank attributed economic contraction in 2Q21 to supply chain disruption and normalization in the housing market. It, however, highlighted the strong growth in domestic demand (> +3%). Interestingly, it did not mention the surprising decline in the flash GDP reading for July. Maintaining an upbeat 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 supply bottlenecks could weigh on the recovery”.

On inflation, policymakers retained the view that the recent strength has been driven by “temporary factors” which should prove “transitory”. They reiterated that that the “persistence and magnitude” of these factors remained “uncertain” and would be “monitored closely”. Besides, the members acknowledged moderate wage increases, well-anchored inflation expectations in the medium term and the recent in rise in core inflation. We believe the references reflect that the members are less certain about the inflation outlook now than previously.

All monetary policy tools were kept unchanged, as a result of disappointing GDP data, resurgence of the pandemic and the upcoming elections. Yet, a cautiously optimistic BOC suggests that tapering would resume unless the situation worsen. We expect the QE purchases would be lowered to CAD 1B/ week in October, while the first rate hike will arrive in late 2022.