Election Campaign to Keep Bank of Canada Quiet: Decision Guide

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The Bank of Canada will likely tread carefully this week, mutedly acknowledging a weaker-than-expected economy in the midst of a heated election campaign.

Policy makers led by Governor Tiff Macklem are set to leave the Ottawa-based central bank’s benchmark overnight interest rate unchanged at 0.25% in a 10 a.m. policy decision Wednesday, and maintain purchases of government bonds at the current pace of C$2 billion ($1.6 billion) each week. 

Yet Macklem will be under pressure to address mounting uncertainty about the state of Canada’s recovery on the heels of a shock contraction in output. Gross domestic product dropped 1.1% in the second quarter, the national statistics agency said last week, well below the 2.5% expansion the bank forecast in July.

Election Campaign to Keep Bank of Canada Quiet: Decision Guide

Wednesday’s statement-only decision comes amid the final two weeks of an election battle between Prime Minister Justin Trudeau and Conservative Leader Erin O’Toole. Canada’s recovery from the Covid-19 crisis and risings costs of living are key issues ahead of the Sept. 20 vote, which polls suggest could go either way.

“In an effort to remain apolitical, expect the Bank to soft-peddle the weakness in growth, and emphasize that there’s plenty of uncertainty,” Benjamin Reitzes, Canadian rates and macro strategist at a Bank of Montreal, said in a report to investors. Any talking up of weak output and hot inflation data “runs the risk of being pulled into the election campaign,” he added.

Taper Timing

While there will be no new forecasts or press conference after the decision, Macklem will deliver a speech to the Quebec chamber of commerce and take audience questions on Thursday at midday. The speech is titled “QE and the Reinvestment Phase,” suggesting Macklem could provide commentary on how the bank will wind down its quantitative easing program. 

The Bank of Canada has been one of the most aggressive major central banks when it comes to withdrawing emergency stimulus, beginning its reduction of bond buying at the end of last year. The European Central Bank is expected to decide Thursday whether or not to slow its purchases in the fourth quarter, while weak employment numbers complicate the U.S. Federal Reserve’s potential decision to start tapering later this year.

Election Campaign to Keep Bank of Canada Quiet: Decision Guide

Keeping mum would prevent either the incumbent Liberals or opposition Conservatives from weaponizing any shift in tone on the economic outlook. But Macklem cannot ignore the string of concerning data.

“The BoC will have to concede that recent growth has been weaker than expected,” Andrew Kelvin, senior Canada rates strategist at Toronto-Dominion Bank, said by email. “The medium-term outlook will remain constructive (with no change in forward guidance), but noting that growth has stalled could give it a dovish tinge.”

Macklem’s thoughts on decade-high inflation readings will also be worth watching. Annual consumer price gains climbed to 3.7% in July, eclipsing the bank’s 1% to 3% control range and providing fodder to Trudeau’s opponents. Still, policy makers will likely reiterate that the pressures are transitory due to supply chain disruptions.

Election Campaign to Keep Bank of Canada Quiet: Decision Guide

The bank is also likely to reiterate its guidance on the timing of rate hikes, signaling they’ll keep borrowing costs low until the economy is fully recovered -- something it doesn’t expect to happen until the second half of 2022. Swaps trading suggests investors are pricing in one hike in Canada over the next 12 months, and at least two more over the following year.

And despite the setback in the second quarter, most economists still expect the bank will taper its bond buying to C$1 billion in October. That would essentially bring the bank’s quantitative easing program to a net-neutral pace, where it’s neither expanding nor contracting its holdings. 

Macklem hasn’t provided much guidance on how long such a reinvestment phase would last and whether the bank would end it before beginning to raise rates, according to Veronica Clark, an economist at Citigroup Global Markets Inc. in New York.

“That will be helpful to know,” Clark said by email.

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