Incoming BoC Chief Macklem Likely To Stay The Course At Inaugural Meeting

- BoC expected to leave rates and QE programmes unchanged

- Tiff Macklem due to become BoC Governor on Wednesday

- Household/mortgage indebtedness still a major concern

- Decelerating expansion of the BoC’s balance sheet set to continue

- Announcement scheduled for 10.00EST/14.00GMT


By Harry Daniels

Editor-in-Chief, LiveSquawk News



2 June 2020


Tiff Macklem’s first rate meeting at the helm of the Bank of Canada on Wednesday is expected to produce virtually the same policies set during the last meeting, according to economists.


The overwhelming market consensus is for the bank’s governing council to keep the overnight rate at 0.25pct and remain prepared to add to its current quantitative easing programme if required. At the start of the corona crisis the bank was quick to implement major liquidity programmes amounting to weekly asset buys of at least CAD5bln of Government of Canada bonds.


Since the crisis began, the bank has reduced its policy interest rate by a total of 150 basis points to 0.25pct, what the bank calls its "effective lower bound".


A note from Carlos Capistran and Ben Randol of BofA Global Research says, “The BoC acted fast amid the pandemic to bring the policy rate down to the effective lower bound. We expect the BoC to leave the policy rate at the current level for many quarters and believe the chance of a negative rate is low.”


In a recent speech, Deputy Governor Timothy Lane suggested there would be little near-term impetus to add policy accommodation. “While we ‘never say never’, the bank’s decision is not to cut rates again.”

Job environment to remain difficult

The country is still navigating its way through the pandemic lockdown and is dealing with high levels of unemployment. The BofA analysts point out that the unemployment rate is already at double digits and a worrisome development given the high level of household debt in Canada compared to other advanced economies.

Despite the poor state of the labour market, overall economic health has fared better than initially feared. The latest Financial System Review (FSR) released on 14 May expressed confidence that the financial sector was well-placed to “weather the pandemic storm.” A number of economic indicators due out this week should offer an updated measure of activity, the most important of which is the May labour market report due on Friday, 5 June.


TD Securities said, “The Canadian labour market should see further job losses in May, albeit modest by recent standards, with employment forecast to decline by 250,000. Our forecast for additional job losses reflects another significant (>1mln) increase in emergency benefit applicants between the April and May reference weeks, which should offset those returning to work.”

Household indebtedness a weak point
Morgan Stanley Research / BIS

The FSR highlighted household debt as an area of concern and noted that "about 20 percent of all mortgage borrowers do not have enough liquid assets to cover two months of mortgage payments".


At his last scheduled appearance before the Senate National Finance Committee, outgoing Governor Stephen Poloz said the introduction of a scheme to purchase up to CAD500mln in Canada Mortgage Bonds per week would support the healthy functioning of an important market for mortgage lending to Canadians.


“Mortgage rates are particularly important for Canadian financial conditions as Canadian households carry a considerable amount of mortgage debt – with mortgage debt been the fastest-growing source of indebtedness in the past two decades,” noted Morgan Stanley Research.

Looking to the future

Ottawa’s plans to gradually reopen parts of the economy has spurred a small improvement in a key sentiment gauge. Despite a third successive monthly contraction, IHS Markit manufacturing PMI for May rose to 40.6 (seasonally adjusted) from a record low 33.0 in April.


Macklem, a former BoC senior deputy governor, is not expected to drastically alter the narrative of his predecessor Poloz during Wednesday’s announcement. However, investors will look for language that reflects the more optimistic outlook expressed in recent survey data.


HSBC’s David G. Watt said, “The statement is expected to reiterate Governor Stephen Poloz’s recent view that the decline in economic activity might be tracking the BoC’s ‘best case’ scenario from its April forecast that GDP that might decline by between 15pct and 30pct relative to its level in late 2019. Looking ahead, the policy statement is expected to highlight that the bank stands ready to adjust the asset purchase programs to support financial markets and that it has the tools to provide additional monetary stimulus if required to support a sustainable recovery.”