BoC preview

In the past few months, global economic uncertainty has put downward pressure on the price of Canada's resources, weighing on the nation's already beleaguered resource patch. We recently pulled forward our call for a BoC ease to October of this year from January 2016, citing downside risks to growth stemming from commodity prices and weak global demand. Indeed, the price of WTI oil is $45/bbl (as this goes to print), roughly $15/bbl below the July MPR assumption. Thus, the Bank of Canada's (BoC) hopes for in-quarter growth of around 2.8% annualized in 2016 may be difficult to achieve, leaving a wide and persistent negative output gap.

A few weeks ago, a September ease looked somewhat likely. However, oil prices have crept higher, and global headline growth risk has faded. Most importantly, recent news from Canadian economy has been encouraging, with GDP growth in Q2 of -0.5%, in line with the BoC's expectations. June GDP rose by a whopping 0.5% m/m, pointing to a solid end to a very weak first half of the year. Thus, even, with underlying economic weakness likely on the horizon, there is little reason for the BoC to jump the gun and ease the overnight rate in September.

"The BoC will likely nudge the overnight rate down in October if oil prices remain subdued and growth remains tepid, as further stimulus would be needed eliminate economic slack",says BofA Merrill Lynch.