Upcoming BOC & ECB Rate Decisions: Time for Policy Change?

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September is seen as a pivotal month for the recovery as well as projections for the rest of the year. Summer officially comes to an end. Often, the trend seen in September is predictive of how things will be until Christmas (and how US elections will turn out). If markets trade positively through the month, it’s likely that they will end the year in the green.

The question now is what will central banks do to encourage investor sentiment. Will policy be tweaked now that the economies have several months of recovery?

Canada to Stay Steady

The BOC interest rate decision is generally expected to conclude with no changes, keeping the interest rate at 0.25%. The most recent survey of Canadian economists shows that all of them expect not only the rate to stay the same, but the rate statement to be basically identical to the one after the last meeting. Governor Poloz is not even scheduled to have a press conference.

At the last meeting, the BOC provided it’s latest guidance. They affirmed their commitment to the 2% inflation target. The consensus is that the current QE program is adequate.

For now, inflation is expected to remain low, and the BOC isn’t interested in negative rates. But soon inflation is expected to tick up, which means the BOC is likely going to try to thread the needle to keep the stimulus going for as long as possible before inflation forces their hand.

In any case, the consensus among analysts is that rates will remain at this level. This is at least through the entirety of next year.

ECB Meeting Expected to be Lively

Expectations for the ECB’s meeting on Thursday have turned up a few days ago when their Chief Economist Haldane let the markets know that regulators would be concerned about the shared currency getting too strong. That precipitated a major drop in the currency.

The question now is will that be discussed at the meeting, or addressed by Chief Lagarde at the press conference afterward? Definitely a reporter will ask about it, and we could expect some market volatility depending on the answer.

The near-universal consensus is that the ECB will keep rates as they are at 0%. There doesn’t appear to be any appetite for negative rates. Furthermore, it is obvious that they won’t raise them in the middle of a pandemic.

Where there isn’t much consensus is whether there will be tweaks to their “unconventional” policies like the PEPP envelope (the bond-buying program) or a change in guidance policy.

Potential Actions on the Table:

There is speculation that the ECB might follow the Fed in announcing an average inflation target. This would be interpreted as dovish. Similarly dovish, they might announce an increase in bond purchasing in the near future.

Where there is more agreement is that Lagarde will try to use the press conference to guide the market, more than a specific change in the statement.

For example by providing a more pessimistic outlook on the recovery, suggesting that easing policies will be in place for longer than currently expected by the market. Or to announce a cut in the ECB’s inflation targets. All of that would likely be interpreted as dovish and weigh on the Euro.

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