At its October meeting held this week, the Bank of Canada increased interest rates by a further 0.25% with rates now sitting at 1.75%; their highest level since December 2008. This is also the fifth time the BOC has raised rates since it began tightening last summer.
Poloz Sounds Confidence
The decision to raise rates again, as explained by Governor Poloz in the conference following the meeting, reflects the bank’s optimism around the strength of the Canadian economy. Specifically, the outlook has been improved following the recent success in negotiations between the US and Canada leading to the creation of a new free trade between the US, Canada, and Mexico.
The BOC had previously noted uncertainty around the negotiations as one of the key risk factors in its outlook, but with that risk factor being removed, Poloz explained that “the reality is the economy… is no longer needing stimulus”.
Statement Takes A Hawkish Twist
In terms of a statement, we saw a decidedly hawkish shift as the bank moved away from describing its policy approach as the “gradual” removal of accommodative policy, suggesting that a faster pace might now be seen. This is in line with the bank altering its language around data dependence away from policy changes being “guided” by data to “take into account”. This suggests that the bank will now be less data-dependent, reflecting the growing confidence of the BOC.
The BOC also clarified that in order to meet the inflation target, rates will need to be increased to their neutral level which is estimated to be around 2.5% – 3.5%. Current market pricing shows the BOC hiking rates as high as 2.8% during this cycle, marking the middle of this range, which means that for now, market expectations are in sync with the BOC’s projections.
USDCAD is currently a story of conflicting trend lines. Price has been moving in a broad bullish channel since September last year while recently correcting lower in a short-term bearish channel. While the rising trend lines remain intact, focus is on a resumption of the bullish move at some point, with the current formation looking like a bullish flag.