PREVIEW: BoC Policy announcement due Wednesday 4th September at 1500BST1000EDT

The BOC's rate decision will be published at 1500 BST/1000 EDT on 4th September 2019. The Bank is expected to keep rates
unchanged at 1.75%. It is a statement-only meeting; no post-meeting press conference with Governor Poloz, and no updated
economic projections. However, BoC Deputy Governor Schembri will deliver his Economic Progress Report on Thursday.
While the Street does not expect any policy action in September, it will be keeping an eye out for clues on what the central
bank will do in October.

RATES: likely acknowledge the worsening trade landscape, which

The consensus expects the BOC to maintain rates at 1.75%,
though there is around a one-in-five chance of a 25bps cut,
according to money markets; the September confab is largely
seen as a staging meeting ahead of October, where the
market prices an approximate 70% chance of a 25bps rate
cut, with the rate decision to be accompanied by updated
forecasts.
TRADE WARS:
Since the last meeting, trade wars have escalated, and
domestic growth data has been mixed; inflation is on target,
and financial conditions have loosened. There has not been
enough in the data to push the BOC into cutting in September,
and accordingly, the statement will be scoured for clues on an
October move, according to UBS; "The statement would have
to give a clearer signal for a cut in October in order to exceed
dovish expectations at this point, but the Bank of Canada is
more likely to keep the optionality to signal at a future speech
if necessary." The key phrase within the BOC's statement is
that accommodation "remains appropriate"; the question is
whether the BOC sees the ramp up in trade tensions as
sufficient to tweak its language. UBS thinks it is a close call,
arguing that given the BOC's stance has appeared data-
dependent, rather than pre-emptive, it does not seem as
though there is enough here to compel the central bank to shift
so strongly, particularly given that it can maintain the
optionality to signal through a speech sometime before the
October meeting.
OCTOBER SIGNALS:
Scotiabank argues that retaining the reference that it “remains
appropriate” to keep policy accommodative in the statement
without alteration might be interpreted as a hawkish sign,
relative to what markets have priced in (a full rate cut by the
end of the year, and another cut in 2020). With that said,
Scotia says explicit forward guidance is still unlikely given
Poloz is not a fan, but the bank still notes that the BOC has
altered its 'bias' language multiple times in 2019, suggesting
there is still a possibility. (in Jan, it guided rates "will need to
rise over time into a neutral range to achieve the inflation
target"; in March, it said the outlook "continues to warrant a
policy interest rate that is below its neutral range", and added
that there was "increased uncertainty about the timing"; in
April, it removed references to rising rates, and stated "an
accommodative policy interest rate continues to be warranted"
and it "will continue to evaluate the appropriate degree of
monetary policy accommodation as new data arrive"; in July,
it reintroduced the reference to "the degree of accommodation
being provided... remains appropriate" and said it is watching
energy developments and “the impact of trade conflicts on
prospects for Canadian growth and inflation"). The BOC will
could possibly indicate the central bank might revise its
outlook for exports in October.
BETWEEN SEPT-OCT:
Between now and October, Scotia thinks the BoC may walk
the line between downside risks to the outlook while flagging
recent strengths. "The case against easing entails pointing at
core inflation that is on-target, escalating wage growth in the
context of strong second quarter economic growth, and the
impact easing could have upon reigniting imbalances in the
housing market," and "the case in favour of easing entails
referencing persistent slack, and added downside risks to
growth that could lead to slack persisting for longer than the
BoC previously anticipated." This could call into question the
durability of the return to the inflation target, thus requiring a
policy nudge, Scotia argues. "Further, the Q2 GDP gain wasn’t
terribly impressive ‘under the hood’, with inventories relatively
high, which may suggest a retrenchment in hiring and
production." Market-based measures of inflation are also low,
but Scotia says they are not terribly reliable in Canada.
CAD:
Relative monetary policy may put pressure on the CAD. The
Canadian rates curve is inverted with policy rates at 1.75%, 2-
year rates around 1.35%, and the 5-year at around 1.20%, and
this means that by avoiding loosening policy, the BOC risks
tightening liquidity conditions at a key juncture in its outlook.
"I'm not sure that central banks should be sending such a
message to bond markets in the current environment; as
chock full of smart folks and models as they are, central banks
are up against bond markets that can undershoot and
overshoot resting points, but that are priced by thousands of
agents constantly incorporating new information such that the
information they reveal can be informative," Scotia's analysts
write, "that said, the inverted Canadian sovereign curve is a)
not as clear a recession signal over history as in the US, and
b) not backed up by an inverted corporate curve."