BOC is expected to leave the policy rate unchanged at 1.75% this week, and for the rest of the year. Data flow since the last meeting has remained resilient, offering the central bank more room to take a wait and see mode and assess the economic developments. We believe the policy statement would be largely similar to the previous meeting, with policymakers reiterating that the “degree of accommodation being provided by the current policy interest rate remains appropriate”, while pledging to monitor incoming data on future adjustment of the monetary policy.
Inflation has risen above BOC’s target. Headline CPI accelerated to +2.4% y/y in May from +2% in the prior month, beating consensus of +2.1%. Core CPI improved significantly to +2.1%, from April’s +1.5%. Moreover, the average for BOC’s three preferred inflation gauges came in at +2.07%, up from +1.9% in April.
As we look back in interest rate normalization cycle after the 2007/08 global financial crisis, BOC has raised its policy rate less aggressively that the Fed. That is, more stimulus measures are in place in Canada, when compared with the US, to support economic growth. This has offered BOC more flexibility to wait and see before taking further action to adjust its policy.