Today’s Bank of Canada policy statement was always expected to be a non-event given the amount of uncertainty that still remains in the economic outlook and the lack of communication channels at the bank’s disposal.
With no press conference scheduled, the bank maintained its current level of stimulus, while referencing the improvements to the near-term outlook. However, while many recently have equated the positive developments with earlier policy normalisation by the Bank after their inclusion of “as the Governing Council continues to gain confidence in the strength of the recovery, the pace of net purchases of Government of Canada bonds will be adjusted” in January’s statement, the BoC were quick to temper expectations this time around.
The Bank outlined the slew of negative risks that remain to the outlook despite incoming data beating expectations.
The biggest risk beyond that directly related to the virus is the level of slack that remains in the labour market. While labour market slack will naturally be absorbed over time once the economy is reopened, the pace at which part-time jobs will be added is a function of vaccine distribution, which remains sluggish at present. Additionally, the Bank’s explicit reference to low-wage workers, young people and women when referencing recent job losses could be a sign of the central bank taking a more holistic view on the labour market. This shift would be in line with that currently underway at the Federal Reserve. Recently, Fed Chair Powell outlined new measures the central bank has looked at to determine the labour market recovery, citing a dashboard that consists of Black unemployment, wage growth for low-wage workers and labour force participation for those without college degrees. These sections of the overall labour market have traditionally taken longer to recover than broader metrics such as the overall unemployment rate, and therefore marks a dovish shift in the Fed’s reaction function.
While the BoC holds a single mandate focusing on inflation as opposed to the Fed’s dual mandate, the implications that slack in the labour market has on inflation, especially if unequally distributed, means the BoC could join the Fed’s suit in taking a more detailed stance on the labour market recovery.
While that wasn’t explicitly outlined in today’s statement, a careful reading of it suggests this shift could be on the horizon if the central bank wishes to temper market expectations of policy normalisation further.
Beyond that, the question now lies in when the BoC will taper their QE programme. Few answers were delivered in today’s policy statement, meaning the emphasis is now on Deputy Governor Schembri’s economic update tomorrow at 11:30 EST and Friday’s labour force survey data for February. We maintain the view that the BoC will normalise policy prior to the Federal Reserve, but deem April’s meeting as too premature to scale back QE purchases from the current pace of at least C$4bn per week. Instead, we think the BoC will give clearer forward guidance on their QE programme, hinting that a reduction in the pace of minimum purchases will be incoming. However, six weeks is a long time in markets. Improving incoming data, faster vaccine distribution and a stimulative Spring budget will likely bring forward our view of QE tapering occurring at the April meeting.
USDCAD shows no dramatic moves as the BoC statement comes bang in line with expectations
Canada’s yield curve falls along with rest of the DM market (excl USTs) as BoC offsets hawkish message with downside risks
Author: Simon Harvey, Senior FX Market Analyst