Canada Builds The Case For Higher Rates

The Bank of Canada left policy unchanged but offered hints that we should expect further QE tapering soon with a rate hike firmly on the agenda for the second half of next year. In FX, this should translate into USD/CAD trading consistently below 1.20 in 2H21.

Bank of Canada Governor Tiff Macklem takes questions from reporters on the phone as he participates in a news conference at the Bank of Canada

A steady ship... for now...

The Bank of Canada haven’t provided any surprises, leaving the policy rate at 0.25% and keeping weekly QE asset purchases at C$3bn. They have also maintained their forward guidance that they will keep interest rates unchanged until excess capacity in the economy has been absorbed and inflation consistently hits 2%. They continue to think this will be “sometime in the second half of 2022”.

The BoC acknowledge that 1Q GDP was a touch softer than expected and April and May activity data will be hampered by the constraints from Covid containment. Employment has also stalled recently for the same reasons, but things are set to change rapidly.

Canada employment versus US Feb 2020 = 100

Source: Macrobond, ING

Strong vaccine program points to vigorous 3Q growth

Canada’s Covid vaccination program has been remarkably successful over the past two months. The proportion of people having received at least one dose of the Covid vaccine has surged from below 15% at the beginning of April to overtaking that of the US at 60% today. This has been aided by the government’s strategy of delaying second doses for two-shot vaccines, hoping that the degree of protection provided by first dose will contain hospitalizations.

The number of Covid cases is indeed dropping fast in response (from above 9,000 new daily cases in mid-April to below 1,300 yesterday) and we expect the bulk of the recently imposed restrictions to be eased just ahead of the summer vacation season. This should allow a broad re-opening of the service sector, which should rebound sharply and complement the vigorous growth experienced in the manufacturing, construction, and commodity sectors.

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Disclaimer: This publication has been prepared by the Economic and Financial Analysis Division of ING Bank N.V. (“ING”) solely for information purposes without regard to any ...

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