Interest Rate Expectations from the Bank of Canada
- The Bank of Canada is likely to reduce its key interest rate to 2.50%.
- The Canadian dollar has shown resilience against the US dollar this month.
- The Bank of Canada has maintained its rates during the last three policy meetings.
- The effects of US tariffs on the Canadian economy are a critical issue.
The Bank of Canada (BOC) is expected to lower its benchmark interest rate by a quarter of a percentage point this Wednesday, bringing it to 2.50%. This follows a series of decisions where no changes were made.
Weak economic growth, a sluggish job market, and controlled inflation seem to support the idea that the BOC will continue its trend of easing. Notably, Canada’s economy contracted by 1.6% in the second quarter, which was far worse than was anticipated. Additionally, over 100,000 jobs were lost in July and August, pushing the unemployment rate up to 7.1%. The inflation figures released on Tuesday only reinforced predictions of potential rate cuts, as the Consumer Price Index (CPI) increased by 1.9% year-on-year, which is below the projected 2%. Meanwhile, the CORE CPI remained steady at 2.6%.
In comments reported by Reuters, Andrew Grantham, a senior economist at CIBC Capital Markets, posed an interesting question: “Did the cycle of rate reductions already reach its end?”
Bank Governor Tif McClem stated that the decision to hold rates steady was influenced by unsettling inflationary pressures. Various measures still show inflation metrics around 3%, indicating persistent issues worth policymakers’ attention.
Nonetheless, he quickly added that not all the price pressures are here to stay. Factors like a stronger Canadian dollar, slower wage growth, and underperforming economic capacity should help moderate inflation over time.
Taylor Schleich, an analyst at the National Bank of Canada, weighed in on the BOC’s upcoming decision, suggesting that after stabilizing in prior meetings, a cut of 25 basis points seems likely. There’s hope for avoiding the reduction entirely, but circumstances are tenuous.
Monetary Policy Announcement Timeline
The Bank of Canada is set to announce its monetary policy decisions at 13:45 GMT on Wednesday, followed by a press conference with Governor McClem at 14:30 GMT.
Market observers largely predict rate cuts, with expectations pointing to a potential easing of up to 45 basis points by the year’s end.
According to Pablo Piovano, a senior analyst at FXSTREET, the Canadian dollar has been gaining traction against the US dollar, moving towards the 1.3750 level recently.
He mentioned that the updated data might see the currency pair moving towards the August low of 1.3730-1.3720. Support levels are identified at 1.3575 (July 23) and 1.3556 (July 3), with further support at 1.3538 (July 16).
On the upside, resistance levels remain at 1.3924 (August 22), and then at the round number 1.4000, with the May cap at 1.4015, emphasizing the importance of the 200-day simple moving average (SMA).
From a broader viewpoint, as Piovano points out, the bearish trend holds steady as long as trading stays under the 200-day SMA, though momentum indicators show mixed signals.
The relative strength index (RSI) is currently below 43, suggesting continued downward momentum, while the mean directional index (ADX) sits around 16, indicating a lack of strong trends.
Upcoming Economic Indicators
The Bank of Canada will hold a press conference to announce its monetary policy report, where questions from media will be allowed. Typically, hawkish statements bolster the Canadian dollar, while dovish remarks may weaken it.
