BoC likely to maintain status quo – BMO CM

Benjamin Reitzes, Senior Economist at BMO Capital Markets, suggests that not much has changed since the January policy meeting for the Bank of Canada heading into today’s policy announcement.

Key Quotes

“The economy is growing perhaps slightly better than expected (but likely within their 0.5 ppt margin of error), and the broader backdrop has evolved largely as anticipated. Moreover, the uncertainties highlighted in recent statements are likely to be reiterated, as we’re no closer to clarity on U.S. fiscal plans.”

“The divergence theme will probably be stressed once again, with the U.S. economy nearing full capacity while Canada still has plenty of slack. Along those lines, prior BoC statements sounded concerned about Government of Canada bond yields being pulled higher with U.S. Treasury yields. That point will probably be worth a mention again, though Canadian yields have been almost steady since the January meeting. (As an aside, the latter reinforces the point that the BoC’s dovish jawboning hasn’t had much impact on the market.) The Canadian dollar is also close to levels that prevailed heading into the January meeting. Given the lack of traction in non-energy export volumes, which no doubt chafes Governor Poloz, the tone of the statement will likely continue to have a dovish slant, keeping the Canadian dollar on the defensive.”

“On the inflation front, the surge in January CPI has it tracking well above the January MPR forecast. However, core inflation remains subdued, even though it has picked up from recent lows, and remains consistent with “material excess capacity”. With the output gap only projected to close around mid-2018, underlying inflation should only slowly accelerate toward 2%.”

“The overall tone of the statement will be cautious. As much as the recent data suggest that the economic backdrop has gained momentum, the BoC will avoid sounding meaningfully upbeat to avoid lifting the loonie and bond yields. Even so, anyone hoping for an overtly dovish statement will probably be disappointed.”