BOC is widely expected to leave its overnight rate at the effective lower bound of 0.25% in January. The size of asset purchases will also stay unchanged at CAD4B/week. Over the past month, there has been market speculations about the possibility of a micro rate cut since November. While such a move is unlikely at the upcoming meeting, clarification from Governor Tiff Macklem is closely awaited. Besides the monetary policy stance, the central bank will hold a press conference as well as release the latest economic projections.
Economic conditions have continued to improve since the December meeting. The momentum has, however, slowed. On inflation, headline CPI improved to +0.95% y/y in November, while core CPI climbed higher to +1.5% y/y. BOC’s preferred inflation gauges averaged at 0.7% during the month. On the job market, the unemployment rate stabilized at 8.6% in December, However, the number of payrolls, dropped -62.6K, the first decline since April 2020.
The bar for further rate cut is high as this indicates adjusting the effective lower bound which has been set at 0.25%. Meanwhile, lower interest rates could pour fuel to the red-hot property market. The country’s home sales rose +7.2% m/m in December, culminating in an annual growth rate of +12.6% for 2020.