📝Desks Commentary/Reactions to Bank of Canada

RBC:

• The Bank of Canada left its key policies unchanged today and didn’t sound as dovish as it could have following last week’s disappointing GDP data. As is standard practice at meetings without a Monetary Policy Report, the bank simply reiterated its forward guidance from July, putting off any changes to growth forecasts and the timing of the economy reaching full capacity (key to interest rate liftoff) until late-October. We thought the bank would emphasize downside risks to its July projections but today’s policy statement provided a more balanced assessment of economic conditions than we anticipated.

• The bank appears to be discounting a surprising decline in the ‘flash’ estimate for July GDP, instead focusing on job gains in June and July. Given considerable slack in the economy and labour market and well-anchored inflation expectations, the BoC continues to view above-target inflation as transitory but again noted uncertainty around the persistence and magnitude of factors pushing inflation higher.

• Governor Macklem’s progress report tomorrow will focus on “QE and the reinvestment phase” but we don’t think he’ll tip his hand on taper timing. We expect Macklem to be pressed (but reveal little) on risks that the economy doesn’t reach full capacity by the second half of next year, potentially delaying interest rate liftoff. Markets are now pricing in less than two full rate hikes in 2022.

TD Securities:

• The Bank of Canada maintained its monetary policy stance today stating that even though the recovery lost a bit of steam in the second quarter, the ingredients are there for economic activity to strengthen through the remainder of the year. While the Delta variant could complicate matters, the Bank, like us, do not expect the virus to blow the recovery off course in the fourth quarter.

• The Bank will be paying close attention to the upcoming employment and inflation releases. A solid gain in jobs in August alongside a tempering of price pressures should leave the Bank on track to gradually reduce monetary stimulus in coming quarters. However, if the employment report disappoints or inflation picks up further, the Bank's Governing Council will face a more difficult trade off. Boosting monetary stimulus could further aid the recovery, especially given the Delta variant risk, but runs the risk of accelerating price growth. With hiccups almost certain to come in one form or another, clear central bank communication will be required to carefully guide the economy to the other side of this pandemic.

ING:

• The case for further QE tapering is strong despite the Covid-19 uncertainty. As elsewhere, supply chain issues, higher energy costs and re-opening frictions mean inflation is likely to stay elevated for quite some time. With employment levels just 1% lower than February 2020, wage and inflation expectations may push higher, which means annual CPI rates could linger at around 4% for a while, double the BoC’s target. Vaccination rates are also looking strong, with 67.6% of the population fully vaccinated and an additional 6.3% partially, hopefully limiting the upside for hospitalisations. Consequently, we are hopeful that this will allow the economy to remain largely open even if case numbers continue to rise

• We favour QE being reduced to $1bn per week at that policy meeting and expect the BoC to start raising interest rates late next year with two rate hikes pencilled in before the end of 2022

• We think that August jobs data will not disappoint, which should encourage markets to price in more BoC tapering and offer some respite to CAD, but political uncertainty is set to remain a potential drag as we head into the 20 September election. The polls-imply a probability of a Liberal Party majority government moved from 60% before snap elections were announced to just 2%, according to 338canada.com, as PM Trudeau saw a sharp drop in his approval rating in the past few weeks. According to the latest polls, it now appears marginally more likely (according to the latest polls) that the opposition party (Conservatives) may secure the most votes and possibly form a new coalition government.

*Image taken from ING's