BOC Rate Decision: Cuts Keep Coming
The year-long trend of the CAD weakening against the greenback is expected to continue with the BOC’s rate decision today. Canada’s inflation has been cooling off faster than its southern neighbor’s as the economy cools. But, it’s not entirely a done deal, which means there could be some surprises and the currency could move either way.
About three quarters of economists as polled by Reuters think that the BOC rate decision will set the new rate at 4.50%, which would push the interest rate gap with the US to as much as one percentage point. This is important, because of how connected the two economies are, particularly with the US demand for major Canadian exports, such as timber, oil and cars. The slowing American economy might be showing a bigger impact north of the border, which faces higher regulatory burden and transportation costs due to distance.
Continuing the Pattern
This would be the second rate cut in a row. Following the last meeting, Governor Tiff Macklem said that further monetary policy action would be data-driven. The data since the last meeting has been sufficient to warrant a pretty solid speculation that there will be a rate cut. If not, it would likely be a very dovish hold, potentially signaling that the September meeting will include further easing.
With the market pricing in a 93% chance of a rate cut, it would be a major surprise it didn’t happen. Even the “dovish hold” scenario would likely imply a bump higher in the loonie as investors recalibrate a slower rate cutting scenario. The market is pricing in a total of three rate cuts this year. On the other hand, there is still some room for some weakness in the CAD after a rate cut, particularly if the central bank conveys a dovish bias.
Facing the Downhill
At the same time as the rate decision, the BOC will release its quarterly Monetary Policy Report (MPR). That includes forecasts for GDP growth and inflation for the rest of the year. The consensus among economists is that the outlook for price growth will be revised lower, which will likely be interpreted by the market as a sign that there will be more easing coming.
The BOC rate decision has a target range instead of a fixed number that is more common among central banks. With inflation last reported at 2.7%, it’s within the central bank’s 1-3% range, but if it doesn’t move closer to the middle of that space, it could trip up expectations for the easing. The lackluster performance of the economy is cited by economists as a reason for the BOC to keep easing, as higher interest rates are understood to slow economic activity.
It’s About the Language
While it’s generally understood that the BOC will keep the “data dependent” position, what investors might narrow in on is expressions about inflation. If the bank acknowledges that CPI pressures still pose a risk, that might be interpreted as more hawkish as simply saying that inflation is coming into line with the target.
The BOC forecasted the economy to grow an anemic 1.5% this year, with most of the economic expansion being attributed to migration-fueled rising population. The lack of demand has softened business prospects, increasing pressure on the BOC to bring rates down to support the economy.
