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BOC Expected to Provide Another Dovish Hold

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Despite the recent string of disappointing data out of Canada, The BOC is largely expected to keep policy unchanged at its meeting tomorrow, reflecting the cautious approach to BOC monetary policy in response to recent economic data. There has been speculation about an end to quantitative easing in the near future, but the consensus among analysts is that it will have to wait until at least the next meeting.

Markets could get riled up a bit if Governor Tiff Macklem tries to provide some advance warning of the move. That could come in the form of a comment that traders interpret as more dovish than expected. As usual with the delicate communications from central bankers, such an outcome might not actually be intended by the Governor.

How Weak Before Changing Policy?

The slowdown in the Canadian economy is understood to be generally in line with what the BOC was expecting. Arguably, it is what the central bank is looking for in raising rates to cool down inflation. So, the issue is whether the situation is showing a more sluggish economy than what policymakers were aiming for, which could bring forward the end of the tightening environment.

We have to remember that last year the BOC was among the first central banks to suggest that the post-pandemic rate hike cycle was over. But then it had to reinitiate hikes as inflation rebound in what hindsight is showing to be a premature pause in rate hikes. That might leave the BOC in a position to be overly cautious about moving towards easing once again.

GDP vs Jobs

One of the issues facing the BOC, and by extension the analysts trying to predict what it will do, is the variability in some of the data. For example, jobs numbers have come to play a crucial role in BOC monetary policy. As wages increase, consumer demand remains resilient, allowing for prices to stay buoyant and push inflation. But there is a wide range of differences in estimates for wage growth. Labor force surveys show wages growing faster, while employer payrolls show ages declining.

The phenomenon can also be seen in the latest GDP figures, which showed relatively strong growth, above expectations. But the final quarter of the year saw Canada benefiting from global factors more than domestic ones, including strong demand in the US, which boosted Canadian exports and supported GDP. But real GDP per capita fell, which makes the situation more complicated for Canadians also facing higher inflation costs.

Where To From Here

The question is which data is the BOC more likely to lean on when it comes to crafting policy. Economists suggest that the weak economic performance has been largely because of the aggressive rate hikes. Consumers are substantially cutting back spending in the face of higher borrowing costs.

But, inflation still remains stubbornly above target. Even though the economy has weakened, it apparently still hasn’t done so enough to bring price growth in line with the BOC’s target. Given their prior experience of easing up too soon, it seems the market is inclined to expect a move away from tightening to be at the last minute.

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