Tomorrow’s Bank of Canada meeting is unlikely to be as dramatic as expected at the beginning of last month after a string of inter-meeting rate cuts in March saw the overnight lending rate fall by 150bps and the policy rate hit its effective lower bound.
Additional measures to enhance the supply of credit and the functionality of financial markets were also announced, while the bank entered unchartered waters by announcing its first ever quantitative easing programme. Room for further easing still remains in corporate paper and commercial MBS markets, while a funding-for-lending scheme could also be on the horizon if conditions warranted. But the questions that really linger for market participants focus on the length of the unbounded QE program and who is likely to be Governor Poloz’s successor, while volatility in markets may rise due to social distancing rendering lock-up processes null and void. We believe a further cut to the overnight rate is out of scope at this meeting.
The April 15th BoC meeting will come with a press conference and a fresh Monetary Policy Report…
However, the updated projections should be taken with a bucket of salt given that the forecasts hinge on the timing of the end of the containment policies and the associated bounce back in consumer demand. This was recently highlighted by Fed Chair Jerome Powell when questioned on why the US central bank did not release fresh projections last month. Powell stated that any baseline forecasts for growth and inflation past Q2 would just need to be continually updated, suggesting markets should put less weight on the central banks’ forecasts as opposed to the incoming data. The data will be important not just for measuring the economic damage containment policies caused and therefore allowing markets to better gauge the effectiveness of fiscal and monetary reactions, but also for assessing when the BoC will begin to taper its stimulus measures.
As seen by the Reserve Bank of Australia last week, the scaling back of crisis-era policies still bring repercussions in financial markets. These include but aren’t limited to higher bond yields and currency appreciation. The Bank of Canada’s recent communique suggests the central bank is more than aware of this. The QE announcement itself was vague, to say the least, and followed the tone used by the Federal Reserve when they announced their open-ended QE program. More specifics on what buying “until the economic recovery is well underway” really means and what data points the BoC will focus on specifically will be the main theme of the press conference.
Preliminary estimates thus far suggest the BoC’s balance sheet is likely to expand to the range of C$200-300bn. At the current purchasing rate of C$5bn a week, this would imply the expansion in the QE program is expected to end around end-2020/ mid-2021.
However, these are preliminary estimates and are likely to be updated should Governor Poloz give further information in tomorrow’s press conference. The one beauty of the QE announcement thus far, however, is its simplicity. The vague details allow the Bank of Canada to keep policy flexible and Poloz may seek to avoid limiting such a policy instrument for his likely successor.
Tomorrow is Governor Poloz’s last monetary policy decision at the helm of the Governing Council after reports suggested the Liberal Government has yet to reach out regarding an extension to his tenure due to exceptional circumstances. Such an approach would have been similar to the 2-year extension in BoE Carney’s tenure in order to manage the economic repercussions of Brexit. Given the reports that a new governor is incoming, all eyes will now be firmly set on Deputy Carolyn Wilkins during the press conference. Wilkin’s may pick up the lion’s share of questions during tomorrow’s Q&A with journalists to solidify her position as the front running candidate and quash any doubts that she may not be ready to take the reins given her lack of private sector experience. The probability of Wilkins succeeding Poloz as BoC governor has only increased since the outbreak of COVID-19 as the premium for a smooth transition has risen due to the swathe of new policy measures introduced.
Any further policy measures seem distant at present as functionality returns to markets globally. If the BoC were to loosen again at the margin, we expect it to be in their QE program.
The current $5bn of weekly purchases is a drop in the ocean compared to the US Fed’s, and the more targeted approach could be expanded upon should the bank judge that the economic damage of the virus is larger than previously anticipated. Such a move would see the stance of the BoC bond purchasing program shift from liquidity injection aimed at improving market functionality towards a more growth driven intervention. Such a move would also avoid tying the hands of Poloz’s successor, thus in our view is the likeliest change in policy. Any further cuts to the policy rate are highly unlikely after the effective zero lower bound was hit last month. Although Poloz stated that the theoretical lower bound for policy was at -0.5%, we expect negative rates to remain out of scope for now unless the economy shows a marked downturn in conditions.
The market reaction to any tweaks or further guidance announced tomorrow is likely to be lagged and inflated. Given the social distancing policies in place at present, data lock-ups aren’t available for tomorrow’s meeting, meaning the market will have to price the announcement as and when they digest it rather than in quick succession to the incoming summaries.
BoC policies in reaction to COVID-19 thus far:
- 150bp reduction in the overnight target rate
- Government of Canada Bond Purchase Program (GBPP)
- Canada Mortgage Bond Purchase Program (CMBP)
- Bankers’ Acceptance Purchase Facility (BAPF)
- Provincial Money Market Purchase Program (PMMP)
- Commercial Paper Purchase Program (CPPP)
- Contingent Term Repo Facility (CTRF)
- Enhanced term repo operations and Standing Liquidity Facility (SLF)
- Standing Term Liquidity Facility (STLF)
Author: Simon Harvey, FX Market Analyst