Forex Trading Library

Getting Ready for BOC Interest Rate Decision

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The BOC meeting tomorrow is going to be special. Not because we’re forecasting a major change in policy, but because it’s the first to be presided over by the new Governor Tiff Macklem.

Analysts are going to be keen to interpret his new style to see if there are any changes in the bank’s outlook under new leadership.

Taking on a new job in the middle of a pandemic is an extra challenging proposition. And it’s not unusual for a new central bank governor to be unaccustomed to expressing views in a way that doesn’t unnecessarily rile up the markets.

At the moment, expectations are for the BOC to stay the course at this meeting. Therefore, any volatility we might see will likely come from Governor Macklem’s commentary.

What We Are Looking For

The consensus is unanimous that the BOC will keep rates at the record low of 0.25% for the third time. We can also expect it to maintain the asset purchases rate.

Expectations are also for the statement to recommit to maintaining stimulus “if needed” in order to get inflation back to the target range of 1-3%.

Where we might see some change that could affect the exchange rate is if the BOC gives a more positive outlook on the economic situation.

Last week, we had GDP figures that, despite showing a massive drop, were better than anticipated. Restrictions on movement are decreasing, and the number of COVID cases continues to fall.

Some analysts are even projecting positive GDP numbers by May.

Double the Trouble

Canada was hit by a one-two punch in March. The number of COVID cases started to increase leading to lockdowns and border closures with their largest trading partner. And Canada’s most important export dropped dramatically in price.

Evidently, crude prices have not returned to previous levels. And, already once again there are rumblings of discontent among OPEC+ members about the production quotas. However, prices have improved significantly.

A large portion of the recent strength in the CAD can be attributed to higher crude prices. That coupled with a return to risk appetite as investors try to get in ahead of the expected recovery.

But Inflation?

Dealers appear to be more concerned with where the currency will be in the medium term than immediate policy tweaks. There is a rather strong consensus that the BOC likely won’t change policy until the underlying macroeconomic data shows an improvement. And that calls into question what will happen to inflation.

Some analysts point to the slow improvement in demand as anti-COVID measures lift. This suggests that there will be a slow recovery and inflation will remain low.

In that scenario, the CAD is likely to remain under pressure compared to peers until well into 2021.

The Alternative

Others point to low inflation being attributable to lower prices in crude. Combine the recovery in costs for transportation and energy with massive amounts of stimulus spending, it’s a classic recipe for inflation.

So, any comment on the medium-to-long-term outlook in terms of inflation from the BOC is likely to get extra attention. In fact, it might be the catalyst to move the markets.

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