Reaction to the Bank of Canada decision
The Canadian dollar has given back a bit of the post-BOC gain but the market is continuing to digest the abrupt end to QE and pull-forward to the closing of the output gap.
CIBC economists didn't see the move coming:
To be frank, we're surprised by the Bank's optimism on the Q3 outlook, and a bit surprised by the extent of its downward adjustment to potential growth. The combination of those two steps meant that instead of marginally pushing back the timetable for the closing of the output gap, the Bank moved it ahead by a quarter. But, as they say, the proof is in the pudding. Should Q3 GDP come in short of the Bank's forecast, that would be a first step towards delaying the output gap closing.
In terms of markets, they believe it will take poor data on the economy or a dip in inflation to weaken the trends that started today.
Despite the fact that the market was already pricing in four quarter point hikes for 2022, yields jumped and the Canadian dollar rallied on the release of the statement. We'll need data to show the economy underperforming the BoC forecast, and further out, some healing of inflation pressures, to turn that tide
