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BOC Rate Decision: It’s Not Just the CAD in Play

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BOC Rate Decision: It’s Not Just the CAD in Play

The BOC is widely expected to cut rates when it meets tomorrow, which naturally will be the big news for the CAD. But, given the similarities and interconnectedness with the US economy, investors will also be looking to see if this is another occasion of the BOC “leading” the Fed. Typically, the BOC meets before the FOMC, meaning it responds to the situation before its much bigger southern counterpart.

There are a couple of differences this time around, though. The BOC maintains a 1-3% target range, unlike the Fed’s “around” 2% target which is more precise. Canadian inflation has been within this range for four months straight. While US inflation has come down, and bounced up, and moved down again, it’s not within an official “band”. And the Canadian economy has been underperforming. Still, the BOC and the Fed follow the same economic theories, and face similar conditions, so the decision might have an effect outside of Canada.

The Mounting Trend

The BOC wouldn’t be the first of the “smaller” central banks to pull the trigger on interest rates. Already the Swiss National Bank (SNB) and the Swedish Central Bank (Riksbank) have moved to cut rates. This is seen as part of a gathering trend that foreshadows the big central banks getting around to making the same move in the near future. The question now is the timing.

At the last meeting, the BOC said it was waiting to get enough evidence to conclude that inflation will stay down. The CPI report for the last month appears to have convinced the markets that there is enough evidence for the central bank to make its move. If it does, then the question after that is at what pace will it continue.

What Is Expected to Happen

The rate cut isn’t seen as a done deal, necessarily. Three quarters of economists expect easing to happen this time around, while the rest see it at the next meeting. The consensus among economists is that there will be a total of four cuts this year, as Canada is expected to have a much more aggressive easing cycle than the Fed.

But this also brings up comments from Governor Tiff Macklem that the interest rate gap with the US can’t get too wide. And rates in Canada are currently half percentage point below its southern counterpart. Meaning that unless the Fed gets around to being more aggressive in its cuts than is currently expected, there could be limited downside for Canadian Rates.

How the Markets Might React

Markets are even more convinced there will be a rate cut, with around 80% chance priced in according to futures markets. That means that if there is a cut, the market reaction could be muted, and depend more on what the statement implies for the future of rate cuts. The market is also broadly expecting at least one more rate cut over the next two months.

On the other hand, if the BOC fails to deliver, it could be a bit of a surprise for the market. That would likely push up the CAD substantially, unless the BOC delivers a very dovish statement to justify the punt on the rate cut.

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