BoC likely to keep overnight lending rate at 0.50 pct, says Scotiabank

Next Wednesday’s Bank of Canada (BoC) meeting will end in a statement-only affair at 10amET forecast updates or a press conference. The overnight lending rate is universally expected to remain at 0.5 percent both in terms of the consensus of economists and market-derived probabilities.

The bigger issue is whether the bias will be incrementally altered, particularly in the context of a pile-on that has been shorting the Canadian dollar and going long on the front-end of the Canada curve at least until very recent developments. This has been in anticipation of incrementally more bearish news for the economy and financial system and the Bank of Canada’s possible response, Scotiabank reported.

Growth is presently tracking around a 4 percent annualized print which is in line with revised BoC expectations last month and materially higher than the 2.5 percent forecast in January. Growth has exceeded everyone’s expectations in Q1 compared to the start of the year. That, in turn, would be the third consecutive quarter of solid growth albeit with heavy import distortions.

Contrast that to the stronger case for a serially disappointing economy in 2015 when only one single quarter notched growth over 1 percent. As a consequence, the traditional ‘extended multivariate filter’ definition of the output gap is likely shut, while the ‘integrated framework’ measure still signals significant slack.