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Bank of Canada has room to surprise the market - BBH

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 19, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Córdoba) - According to analysts from Brown Brother Harriman, the Bank of Canada could choose to ease policy, but by introducing an asset purchase program instead of a rate cut.

    Key Quotes:

    “The Bank of Canada is widely expected to cut its overnight rate by 25 bp tomorrow. Unlike the ECB or the Sweden's Riksbank that are easing policy an attempt to arrest low inflation or deflationary forces, the challenge for Canada is growth. The economy has been hit with a significant terms of trade shock and the collapse of WTI and Brent has been more than duplicated by Canada's benchmarks.”

    “A rate cut would not be surprising. However, subjectively we see a modest chance that with the new government pursuing a more accommodative fiscal policy that the central bank bides its time. It also may not want to be seen panicking in response to the market turmoil over the last couple of weeks, which has included a 4.7% decline in the Canadian dollar, which is tantamount to some degree of easing.”

    “Even if the Bank of Canada chose to ease policy, it might prefer to launch an asset purchase program instead of pushing the overnight rate any lower (currently at 50 bp). Governor Poloz has already suggested that he would consider an asset purchase program. Launching an asset purchase program while the policy target rate is at 50 bp is what the Bank of England did. Arguably a bond-buying program may have greater impact that a 25 bp rate cut. The takeaway from this thumbnail sketch of the BoC meeting is that there still is scope for the Bank of Canada to surprise the market.”
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