What to Expect from the Bank of Canada Meeting — July 14, 2021
If you have been following soccer in the last few weeks, you would probably know by now the Euro cup did not come “HOME” as famously chanted by the English fans , but it rather went to Rome. Not so much joy at home front, though, as the Habs (Montreal Canadiens) lost out in Game 5, ending their rousing Stanley Cup run.
Moving on to economic tales, there seems to be some joy there as it appears the labor woes (Alberta aside) are ebbing away. Unemployment rate in Canada fell to 7.8 percent in June from 8.2 percent reported in May. Employment surged by 230.7K in June as most provinces eased restrictions linked to the third wave of COVID-19 infections. The Business Outlook Survey released last week also points to continued and widespread improvement in business sentiment across the country as employers indicated their willingness to do more hiring in the coming months.
Inflation rate (YoY) accelerated to 3.6 percent in May as compared to the 3.4 percent reported in April. Though, this could be partly attributed to base effect, nevertheless it will still be a cause of worry for the Bank of Canada (BOC) as prices rose on the month in all the major eight CPI components. According to the Canadian Survey of Consumer Expectations released by the BOC, spending growth is expected to remain high as Canadian consumers plan to spend some of the savings accumulated during the pandemic when restrictions are lifted.
USD/CAD has been a yo-yo since our last commentary. The loonie which closed at 1.2145 in mid-June is currently above 1.2500 levels. The USD gained further today on news that US consumer price index (YoY) unexpectedly accelerated in June to 5.4 percent against the consensus of 4.9 percent. If a rate hike was ever on the table tomorrow, at least the BOC wouldn’t worry too much about having an overvalued loonie on its hands and the possible adverse spiral effect that may have on Canadian exports to the US.
Alberta: The picture is not yet looking rosy for the province as Alberta’s seasonally adjusted unemployment rate was up to 9.3 percent in June 2021, from 8.7 percent in May 2021. However, we do expect the province to bounce back as economic activities normalize following the easing of all pandemic related restrictions on July 1. According to a CIBC’s Provincial Economic Forecast, the province is forecasted to have the strongest Real GDP growth in Canada for 2021 and 2022 at 7.9 percent and 5.1 percent respectively.
What to Expect Tomorrow
Quoting W. Edwards Deming, “In God we trust, all others must bring data”. It seems all the data points reflect an economy in full flight and running hot. Moreover, Central Banks are being blamed for over cooking the pandemic support soup which may have contributed to the rising inflation, so they will be itching to arrest the situation sooner rather than later. However, they will be wary of getting caught in a situation where they get blamed for moving too soon if the economy falters yet again due to the evolution of the COVID-19 variants.
That said, we believe the Bank of Canada will keep its policy rate on hold at this meeting but may accelerate its tapering program by announcing another reduction in its asset purchase program, a decision which could move bonds yields up especially on the long end of the curve.
The Monetary Policy report that is scheduled to be released alongside the interest rate announcement will be of interest to analysts, as it will give insight details on the thoughts behind the BOC’s forward-looking guidance.
