BOC To Deliver Same Dovish Tone As In Early May, No Change In Policy Stance In June

While the June BOC meeting will likely be a non-event (i.e.: the policy rate will stay at 1% while corresponding Bank Rate and Deposit Rate will remain at 1.25% and 0.75% respectively), the market focus is on whether Governor Mark Carney will hint on a rate hike in the next month. We expect the post-meeting statement will remain dovish, a similar tone as the speech the Governor delivered earlier this month.

 

At a speech title 'Canada in a Multi-Polar World' on May 16, BOC Governor Mark Carney appeared rather pessimistic towards global growth outlook as advanced economies will remained affected by the 'legacy of' financial crisis in coming years. In the US, growth was rather weak and the country does not seem being able to resolve its fiscal issues complexly until after 2012. Domestically, he saw strong growth, but was 'supported by highly stimulative fiscal and monetary policy'. Carney also mentioned that 'he possibility of greater momentum in household borrowing and spending in Canada represents an upside risk to inflation in Canada'. Moreover, the persistent strength of the Canadian dollar could 'create even greater headwinds' for the economy' and put 'additional downward pressure on inflation in Canada'.

 

Concerning inflation, the Governor saw underlying inflation remain 'subdued' but sharp increases in energy prices will keep total CPI inflation above +3% 'in the short-term' before returning to the +2% target by the middle of 2012. The use of the term 'short-term' indicates that the central bank view any overshoots to be temporary. Core inflation is expected to rise to +2% over the same period, as 'excess supply in the economy is slowly absorbed, labor compensation growth remains modest, productivity recovers and inflation expectations remain well anchored'.

 

We expect the statement after the Tuesday meeting will deliver a similar tone. The focus will indeed be the July meeting during which the central bank may announce resumption of tightening and deliver new economic forecasts.