BOC Preview – Policymakers to Keep Upbeat Tone Despite Softening Growth

We expect the BOC to maintain its relatively hawkish outlook at this week’s meeting. Although economic data released since April have softened slightly, strong oil prices and the positive vaccination progress should allow the members to stay optimistic about the recovery outlook. They would also maintain the monetary policy stance as in April, sticking with weekly asset purchases at CAD3B and signaling the first rate hike could come in as soon in as next year.

Economic data released since the last meeting have shown signs of moderating. On the job market, the number of payrolls dropped -13.8K in May, following a -129K contraction in April. The unemployment rate increased for two months in a row, to 8.2%, in May. GDP expanded an annualized +5.6% q/q in 1Q21. It came in lower than BOC’s forecast of +7%, as well as consensus of +6.7%. Inflation continued to increase rapidly. Headline CPI accelerated to +3.4% y/y in April, from +2.2% a month ago. This was mainly driven by strong oil price. Yet, core CPI, inflation excluding food and energy prices, also improved to +2.3% y/y, from +1.4% in March.

Canadian dollar has appreciated +3.5% against US dollar since the last meeting. Policymakers will likely touch more on the issue. Yet, they would not be too concerned about loonie’s strength for now as it has been driven by strong crude oil prices. Moreover, the country’s international trade has performed well of late. The current account recorded a surplus of CAD1.2B in 1Q21, from a revised CAD5.3B deficit in 4Q20, on a higher trade in goods and services. This marks the first surplus since 2008.

Disappointing employment and GDP growth data were likely offset by strong crude oil prices and encouraging vaccination progress. The latter could facilitate faster economic reopening. All in all, the central bank would likely maintain the upbeat tone delivered in the prior meeting and keep all monetary policy measures unchanged.