BOC monetary policy preview

Today Bank of Canada (BOC) is to provide further guidance in policy meet. The result to be announced at 14:00 GMT.

Current policy measures–

• BOC is maintaining overnight deposit rate at 0.5 percentage

The core objective of BOC monetary policy is price stability which means keeping inflation within a range of 1-3 percentage. Headline inflation has fallen close to 1 percentage from 2.5 percentage in 2014 in October last year. Since then it has risen sharply to 2 percentage in January. In February reading came at 1.4 percentage. In April it reached 1.7 percentage and 1.5 percent in May.  The data has been showing a lot of volatility lately.

Economy at a glance :

• Canada is a very small economy of $1.55 trillion approximately, compared to its larger neighbor, the United States.
• Canada suffered technical recession last year as GDP contracted in both first and second quarter. As of December, annual GDP growth rate has dropped to 0.3 percentage from 3.1 percentage a year ago. However, it has bounced to 1.1 percent in the first quarter of this year.
• A recent recovery in oil price may not be much of a boost since severe wildfire has taken a large portion of the production (more than 1.5 million barrels/day) offline. The production is still recovering and may not recover fully until the first quarter of 2017.
• The unemployment rate ticked up recently to 7.3 percentage, compared to the pre-crisis level of 6 percentage. However, recently it ticked down to 6.8 percent last month.

Return of growth in the US is expected to help the Canadian economy as a whole.

What to watch out for –

BOC is expected to keep policy on hold today. Focus will be on what the bank’s take on the appreciation in the exchange rate and on the UK referendum. However, the Canadian dollar has weakened around 600 pips from its recent high over the wildfire and stronger dollar.

At least another rate cut is expected in 2016 from BOC if the situation worsens in the oil front.

Some changes in communication would be vital to watch for -

• Changes in the inflation expectation ahead. Higher or stable expectation would indicate a longer rate pause by the bank.
• Take on the UK referendum.
• The outlook for oil price and impact on the economy.
• The changes in growth forecast ahead and views on ailing manufacturing.
• The recent volatility in the inflation rate.

Impact :

We expect the Canadian dollar to weaken in the short run to as much as 1.4 per dollar but strengthen in medium to longer term to as high as 1.18 per dollar. The Canadian dollar is currently trading at 1.305 per dollar.