Posted on September 7, 2011
Last-minute thoughts on the Bank of Canada
Sep 7, 2011 – 8:18 AM ET | Last Updated: Sep 7, 2011 9:01 AM ET
With the Bank of Canada’s policy announcement set for 9 a.m. ET, economists are making their predictions for what to expect.
A lot has changed since July when the central bank decided to remove the word “eventually” from the sentence: “some of the considerable monetary policy stimulus currently in place will be withdrawn.”
However, economists anticipate the Bank of Canada will leave rates unchanged at 1.00%. Since the Bank of Canada paused a year ago, it has maintained a tightening bias, yet one that appears to be quite flexible with respect to the timing of rate hikes.
With second quarter GDP “grossly undershooting” the Bank of Canada’s forecast for July, the tone will most definitely remain dovish, according to Jimmy Jean, economic strategist at Desjardins Securities.
“The key will lie in the guidance,” he told clients. “We expect more emphasis to be put on the ‘such reduction would need to be carefully considered’ component of the message…”
However, Mr. Jean does not expect that statement will be removed altogether, since that would signal upcoming rate cuts.
BMO Capital Markets economist Michael Gregory also expects a more dovish announcement than July’s statement, particularly since Governor Mark Carney advertised the central bank’s economic outlook downgrade at his August 19 appearance before parliament.
“Key to the downgraded outlook is whether it causes the output gap to close later than the Bank’s prior expectation of mid-2012,” Mr. Gregory said in a research note. “We suspect it will (our estimate is now into 2013), reducing further any sense of urgency to withdraw monetary stimulus.”
He wouldn’t be surprised if the Bank of Canada resorted back to its pre-May mantra: “Any further reduction in monetary policy stimulus would need to be carefully considered.”
This would likely stoke market expectations of policy rate cuts, Mr. Gregory said, adding that slightly more than a one quarter-point cut is already priced-in by January.
Scotia Capital’s Derek Holt doesn’t believe the central bank will cut rates, arguing that it would be on a prolonged hold.
“In the absence of a total liquidity shock, the BoC is likely to be very reticent to explore the lower zero bound on rates all over again,” Mr. Holt told clients. “With the benefit of hindsight, it likely shouldn’t have gone there in the first place, and it sank considerable capital into getting off that floor last year.”
The economist also noted that while the Bank of Canada’s timing was off in terms of removing “eventually” from its rate guidance before the late summer shocks, he credited Mr. Carney for resisting calls for rate hikes long before now.