Expect the BoC to be on hold at Wednesday’s meeting - Nomura

Analysts at Nomura explained that they expect the BoC to be on hold at Wednesday’s meeting. 

Key Quotes:

"Expectations for a hike at this meeting have declined, thus FX market reactions are likely to be relatively muted. If anything, the BoC may nudge the market towards an October hike, and this could cause modest CAD appreciation pressures. Further out, we retain a negative outlook on Canadian growth and expect the BoC to hike at a slower pace than the Fed."

"There are a few key developments to note since the last meeting:

Inflation: Headline inflation jumped to 3.0% y-o-y in July. 

Meanwhile, the BoC’s core inflation metrics remain largely unchanged at 2%. This is not just due to rising energy costs, but also to more volatile components (stripped out of the core CPI) rising. As such, we think the BoC would prefer to wait and see if the increase in inflation spreads to less volatile components rather than reacting to a single data print.

Poloz communiqué: In a CNBC interview Governor Poloz said that the recent uptick in inflation was driven by “transitory factors”, thus showing little willingness to react to July’s data. At this year’s Jackson Hole symposium, Governor Poloz reiterated a gradual and data-dependent approach to policy.

NAFTA: The US and Mexico have made good progress on reaching a NAFTA agreement. Canada re-entered talks last week, which broke down with disagreements continuing. However, we still believe the US wants a trilateral agreement to remain in place. President Trump notified Congress of his intentions to sign an updated NAFTA agreement in 90 days, raising the possibility of a deal this year. The risk scenario is that President Trump also sends a withdrawal notice to gain leverage during negotiations, but we believe the probability of withdrawal is low at 15%."

"An earlier deal would be positive for Canadian business confidence and the BoC’s outlook. The Bank of Canada’s (BoC) hiking cycle can be characterised in two ways: i) data dependent and ii) gradual. While a case could be made that the BoC’s outlook should be improving somewhat, we expect the Bank to remain on hold at Wednesday’s meeting."