- Bank of Canada is expected to cut its policy rate by 50 bps.
- The Canadian Dollar fell to fresh four-year lows against the US Dollar.
- Headline inflation in Canada ticked modestly higher in October.
The Bank of Canada (BoC) will announce its decision on monetary policy on Wednesday. The BoC is widely anticipated to trim the benchmark interest rate by 50 basis points (bps), taking it down to 3.25% and totalling 175 bps in cuts since entering the tightening cycle in June.
Ahead of the announcement, the Canadian Dollar (CAD) hovers around its lowest in four years against its American rival. The US Dollar (USD) firmed up particularly in the last quarter of the year, as investors welcomed the Federal Reserve’s (Fed) decision to also quick-start the monetary tightening path. The result of the United States (US) presidential election also backs the Greenback, as the Republican party will return to the White House in 2025 by the hand of Donald Trump.
Canadian economic growth is still a concern
Growth in Canada remains in the eye of the storm. The real Gross Domestic Product (GDP) increased by 0.3% in the third quarter of the year after rising 0.5% in both the second and first quarters. GDP is tracking below BoC’s forecast in the second half of the year, meaning rate cuts have yet to significantly impact economic progress.
Meanwhile, inflation has remained within the central bank’s goal. According to the latest release from Statistics Canada, the Consumer Price Index (CPI) rose by 2.0% in October, higher than the 1.6% posted in September and above the market expectations of 1.9%. On a monthly basis, the CPI gained 0.4%, reversing the previous 0.4% monthly decline and also coming in above estimates. Additionally, core CPI, which strips out volatile items like food and energy, showed an annual uptick to 1.7% from 1.6% in September. On a monthly basis, core CPI gained by 0.4% compared to September’s flat reading.
The uptick in price pressures indeed is not good news for the BoC, yet it is far from concerning. The central bank has clarified in its latest Monetary Policy Report that they expect headline inflation to remain close to target levels for the foreseeable future, as risks to inflation are roughly balanced out. Policymakers also expect GDP to expand a modest 1.2% this year but improve in 2025 by growing 2.1%.
“Canadians can breathe a sigh of relief. It’s a good news story,” BoC Governor Tiff Macklem said during a press conference after the rate announcement. “It’s been a long fight against inflation, but it’s worked, and we’re coming out the other side.”
“Now our focus is to maintain low, stable inflation. We need to stick the landing,” Macklem added.
As a side note, the US will release the November Consumer Price Index (CPI) briefly before the BoC announcement. US inflation figures may have a substantial impact on USD/CAD, particularly if the CPI is hotter than anticipated, given the Federal Reserve (Fed) is scheduled to meet next week.
When will the BoC release its monetary policy decision and how could it affect USD/CAD?
The Bank of Canada will announce its policy decision at 14:45 GMT on Wednesday, followed by a press conference from Governor Macklem at 15:30 GMT. As previously stated, the BoC is anticipated to trim the benchmark interest rate by 50 bps.
A reading in line with the market expectations will have a modest negative impact on the CAD, with the main focus shifting to Macklem’s words. Market players will be looking for hints on whatever policymakers are planning in the near future to rush to price it in.
Surprise decisions, as usual, will have a larger impact on price. A modest 25 bps interest rate cut could be read as “hawkish,” resulting in a stronger CAD.
Valeria Bednarik, Chief Analyst at FXStreet, notes: “The USD/CAD pair neared the 1.4200 level before retreating from the area, still at risk of extending its advance. The broad US Dollar’s strength is unlikely to recede beyond intraday woes. From a technical perspective, USD/CAD is bullish, yet a corrective decline is on the cards. An initial bearish target and potential support level is 1.4104, the November 15 daily high. A break below the level exposes the 1.3920 – 1.3930 price zone.”
Bednarik adds: “A dovish message regarding future interest rate movements may help the pair breach the 1.4200 mark. USD/CAD may then run towards 1.4297, the April 2020 monthly high.”
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
Economic Indicator
BoC Monetary Policy Statement
At each of the Bank of Canada (BoC) eight meetings, the Governing Council releases a post-meeting statement explaining its policy decision. The statement may influence the volatility of the Canadian Dollar (CAD) and determine a short-term positive or negative trend. A hawkish view is considered bullish for CAD, whereas a dovish view is considered bearish.
Next release: Wed Dec 11, 2024 14:45
Frequency: Irregular
Consensus: –
Previous: –
Source: Bank of Canada
