Forex Trading Library

BOC Rate Decision: Another Hike?

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Despite inflation coming down below 4.0% last month, the BOC is expected to deliver another rate hike when it meets later today. Both headline and core inflation have continued to fall, even with a 5-month pause. But the blip up in prices in April which prompted the BOC to hike last time seems to be leaving a shadow, and the bank doesn’t want to risk a repeat of the scenario.

At least that’s the view of 20 out of 24 economists polled by Reuters last week. Those economists also believe that it’s likely this will be the last time that the BOC hikes in this cycle. The market seems to be pricing in that scenario as well, with the policy statement expected to heavily hint that rates will remain steady for the rest of the year.

The dissenters?

The minority option is that the BOC could go for a “hawkish pause”. The market is pricing in a rate hike, but it’s possible that the BOC might want to avoid two consecutive hikes, since that could signal a more aggressive stance. Recent monthly GDP data has been mixed, with flat growth in April and a sudden 0.4% monthly growth in May.

June jobs numbers reported last Friday were also a mixed bag. The unemployment rate jumped, but so did the number of people being hired. The participation rate also increased, which could explain the bulk of the jobless rate increasing. On the other hand, average hourly earnings were lower than forecast, suggesting that labor tightness was easing. But those earnings were still higher than the inflation rate, which could keep the BOC worried about “second level” effects of higher inflation needing a more aggressive approach.

Potential market reaction

An in-line 25bps hike from the BOC is likely to bring much more attention to the statement, as investors try to parse how likely a hike will be in September. But it’s possible that the bank takes a more ambivalent stance than the market would like, because August is typically a time when central bankers re-evaluate their position. Instead of implying that rate hikes are over, the statement could double down more on assessing the situation and being data dependent. The market might interpret that more as a sign that another rate hike is possible, and give the Loonie a boost.

If the BOC fails to deliver the hike, but talks tough about inflation, then it could end up satisfying the markets. The CAD could stay relatively strong, but that would put the BOC in a more “catch up” position with regards to the Fed.

Lining up with the greenback

The broad consensus is that the Fed will hike at the next meeting, which is part of the current cycle. The BOC hiking now is seen more as keeping up with the Fed, and maintaining the interest rate gap between the two countries. But if the BOC waits until September, then the perception would be that it is falling behind the Fed, hiking in the cycle after. But, the consensus is that the Fed won’t hike in September, so that would still end up leaving the interest rate gap the same.

In the end, hiking now or in September isn’t all that much of a difference. Pausing now and not providing a strong suggesting a hike is coming at the next meeting would likely shock the markets and push the currency to the downside.

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