Preview of the Bank of Canada's monetary policy meeting

The Bank of Canada is widely expected to hold rates steady at 0.25% during tomorrow's monetary policy meeting. In our opinion, the economic data released after the October meeting did not change the short/medium-term outlook for the Canadian CB. Notwithstanding the above-estimate increase in the October cpi core (from 1.5% y/y to 1.8% y/y) the Bank of Canada should not revise its October projection and should maintain the policy rate on hold at 0.25% until the end of Q2 2010. Indeed, inflationary pressures will likely remain subdued in the coming months in the face of a stubbornly wide output gap and as the economy is not expected to reach production capacity before late 2011. Q3 GDP came in lower than the market expectation (+0.4% q/q ann.; see economic commentary section in the weekly "Top Down Outlook" report), suggesting that the pace of the economic upturn may be even slower than projected. With the Canadian Dollar close to its historical high against the US Dollar, we see the Bank of Canada leaving rates unchanged much longer than predicted and start rising them only after the Federal Reserve implements its exit strategy. Indeed, should the Bank of Canada raise rates ahead of the Fed, the Canadian Dollar would appreciate further against the US Dollar, dampening the expansion of exports (exports to the US account for more than 75% of total exports) as the CAD is already 13% overvalued against the USD according to the OECD’s Purchasing Power Parity.