Scotiabank Preview of Today's Bank of Canada Update

Derek Holt, Vice-President, Scotiabank Economics, in his 'Daily Points' note of this Wednesday noted today's Bank of Canada update will be "a statement-only affair." The BoC statement will be followed by the speech tomorrow by Dep Gov Gravelle and then Macklem's traditional pre-holiday Governor's speech next week. "Since it won't be Macklem delivering it all today or tomorrow, that means a meaningful pivot is unlikely," said Holt, before adding "you probably don't drop just a statement today and then send one of your six deputies out to do the deed if you're going to spin on a dime and shock markets."

Holt expects the BoC to hold all policy measures unchanged and to "err on the side of cautious optimism" with unchanged forward guidance toward a hike as early as April, but likely still guided to be in the "middle quarters" of 2022 which reinforces Macklem's remark that all meetings from April to September are 'live for lift-off'.

Holt said: "Any firming up of that guidance may come in January, or they could tee it up with more confidence in March and hike in April, but sooner is a stretch. If they wanted to be bold now then maybe they could place more emphasis upon Q2 given forecast tracking, inflation and labour market conditions, but I doubt they do that just yet. They'll likely flag BC flooding effects, but I'd be very surprised if they don't signal a bias to look through it as a transitory shock (but of course awful to lives in ways not well captured in GDP). Nevertheless, I'd think it to be outright irresponsible for a central bank to signal anything more about policy intentions today given omicron uncertainties. See you in January with fresh forecasts that incorporate further omicron insights and perhaps firmed up details around Canadian fiscal plans."

What, Holt asked, have we learned since the last decision in late October? He noted GDP is "broadly tracking in line with expectations" up to the end of Q3 net of all revisions (maybe a decimal point or two or extra slack which is "meaningless"). Q4 is "looking strong so far" even with BC flooding. Still, by the end of this year, Scotiabank figures the output gap will still be somewhere on the order of -13/4%, thus implying material slack. Holt said: "They've said a zillion times they won't hike until slack estimates go to zip. We're not there yet but expect to be very close by Q2 which would enable them to say the economy is at or very close to shutting capacity at that point and hence a hike."

Furthermore, Holt noted, since the last decision, average core inflation was unchanged at 2.7% y/y even as headline edged higher to 4.7% ahead of next week's 5-handle on the day Macklem speaks. Canada gained another 185k jobs in the two reports since the last decision. Wage pressure is clear in terms of both rising unit labour cost trends and m/m pressures on the freshest available wage measure.