The Bank of Canada will have its monetary policy meeting next week. Analysts at Capital Economics expected no change and they see a statement likely to be similar to the April meeting. They point out the central bank may signal a further reduction in the asset purchases program in July.
Key Quotes:
“Inflation surpassed the upper limit of the Bank of Canada’s target range in April but, with second-quarter GDP growth set to be weaker than the Bank expected and Governor Tiff Macklem concerned about the strength of the loonie, the Bank is unlikely to present a more hawkish policy statement or cut its asset purchases again next week.”
“The key point, for now, is that the Bank’s default position is that the rise in inflation is temporary and, even if it is wrong, there won’t be enough evidence to confirm that until the end of the year. Even the booming housing market seems unlikely to concern the Bank too much for now given the mortgage stress tests have just been tightened.”
“The Bank is therefore unlikely to alter its policy or say anything that new next week, with the exception perhaps of a more explicit hint about when it next intends to cut the pace of its asset purchases.”
“One thing that is becoming increasingly clear is that, when the Bank starts to hike, it is going to have to take an extremely cautious approach. The first-quarter data showed that residential investment now accounts for an extraordinarily high 10.3% of GDP. With that sector particularly sensitive to changes in interest rates, even a gradual tightening of policy risks triggering the next downturn.”