• Forward rate guidance was unchanged
  • CAD and rates reacted dovishly…
  • ...only because some thought the BoC would pivot more hawkishly today
  • Prior confidence in vaccines was dropped
  • Guidance around spare capacity and inflation was little changed
  • The BoC finally acknowledged wage pressures!
  • Overall: See you in January with new forecasts…
  • …and an April hike remains the earliest likely scenario

The Bank of Canada broadly met our expectations for today’s statement. However, the segment of market opinion that thought the BoC would embrace a more hawkish pivot by more explicitly setting up a January hike was surprised by it.

On net, that means the statement was taken as dovish only relative to market pricing that had been getting carried away and was proving to be rather inflexible in light of the omicron variant. Accordingly, the 2-year Government of Canada yield plunged by about 8bps which may have been exaggerated by positioning swings across some market participants. The whole Canadian curve is outperforming the US rates sell-off. CAD depreciated by about half a penny.

The most important point is that the BoC maintained guidance that it will only entertain a rate hike as soon as next April and not before. This is expressed by repeating unchanged forward guidance:

“We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In the Bank’s October projection, this still happens sometime in the middle quarters of 2022.”

Indicating some distance from the October projections is not terribly significant since the BoC had a tendency to anchor its views at non-MPR meetings around its last forecasts. Still, we need to look at other evidence in the statement to see the degree to which they are standing by those forecasts or distancing themselves from it.

On balance, the overall tone of the statement reads like they are leaving their options open into the next forecast assessment in January.

On the neutral/dovish side, they said the following:

  • Prior reference to how “vaccines are proving highly effective against the virus” is now gone. I doubt that’s unintended. Everyone is in the same boat now in terms of evaluating incoming research on vaccine efficacy in response to the omicron variant. It doesn’t mean the BoC suddenly has no confidence in vaccines and if pressed I would expect Deputy Governor Gravelle to say tomorrow that they still believe in them. But the omission likely reflects more uncertainty toward current vaccines. We simply don’t know enough about it yet, but what we do know is at best offering room for cautious optimism. Omicron is likely to cut across populations very unevenly as argued in the morning note.
  • Further, they continue to emphasize ongoing slack in the economy with no new reference to fresh thoughts around potential GDP. We see this where they state GDP was still 1½% below 2019Q4 by 2021Q3.
  • They also say it in the output gap and inflation guidance which is unchanged. The BoC still expects inflation to “ease back towards 2 percent in the second half” of 2022. They did not amplify inflation concerns, but bear in mind that buried within their forecasts is their assumed reaction function on rates and other policy variables in order to achieve such an outcome. Also bear in mind that the BoC has blown its inflation forecasts to date and historically always says they’ll achieve their inflation target and so take that with a mountain of salt. In any event, returning toward target is still compatible with rate hikes since if everything else is at or approaching equilibrium then a more neutral policy rate should be as well.
  • On the back of strong job reports, they now say that employment is “back to its pre-pandemic level.” This might be quibbling somewhat, but no, employment is actually 186,000 jobs above where it stood in February 2020 or about 1% higher. That’s nothing to scoff at in my opinion. There are obvious sensitivities around how the BoC judges labour market conditions given the pending strategic review’s conclusions and their communication by Governor Macklem and Finance Minister Freeland. We’re already at full employment in my view and don’t need to be tinkering with the BoC’s mandate at such a cyclical sensitive point in the cycle without courting a new kind of risks.

On the hawkish side, we have the following:

  • The statement acknowledges that “wage growth has also picked up.” Finally! Someone else is saying what I’ve been saying for many months now! That said, it raises further questions. A big one is whether the BoC is indicating renewed confidence in the LFS wages measure and also emphasizing rising unit labour costs, while distancing itself from the slow moving and lagging ‘wage common’ measure that former Governor Poloz introduced. Further, if the BoC is now acknowledging wage pressures, then does that mean it is now more concerned about reinforcing wage-price effects?
  • They repeated that they are “closely watching inflation expectations and labour costs to ensure that the forces pushing up prices do not become embedded in ongoing inflation.” Recall the evidence from the BoC’s consumer and business surveys with respect to rising inflation expectations plus recall evidence on rising wage inflation. The BoC is saying that if such pressures are further amplified then they’ll respond more hawkishly. Omicron is rather unlikely to help labour scarcity (and hence wage pressures) or supply chain challenges (and hence inflation).

Overall, the BoC did indeed resist spitting in anyone’s holiday ’nog today. They stayed on track with guidance to begin entertaining rate hikes as soon as next April. Now they can sit back and assess incoming evidence on multiple fronts and reassess at the January 26th 2022 meeting when they’ll have their next chance to revise forecasts. By then we should have much more information around the omicron variant and its effects plus Canadian fiscal policy and broader tracking of incoming data and events.

Next up will be DepGov Gravelle’s Economic Progress Report tomorrow at 2pmET followed by a press conference at ~3:15pmET. He could just stick to repeating today’s guidance and updating tracking of how the economy and inflation have been performing, but Gravelle heads the financial markets division at the BoC and the last time he spoke way back in March was about balance sheet dynamics. There are still unanswered questions around balance sheet management going forward but it’s unclear whether the BoC is prepared to provide greater guidance at this stage or closer to the first hike.

Please see the attached statement comparison. 


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