Up until quite recently, the markets were betting that the BOC (Bank Of Canada) would cut rates at Wednesday’s meeting. But last week’s surprisingly strong GDP data has changed that perception. The market is pricing in a more likely scenario of a rate pause. Which means that there is a good chance for volatility no matter what happens.
Analysts have been a bit at odds with Canada’s central bank in their outlook for the economy and monetary policy. Recent data trends have generally been interpreted as positive, and signs that the economy is levelling off. However, BOC Governor Tiff Macklem kept sounding pessimistic, worried that the trade situation would cause an economic slowdown. That would also mean inflation would come under pressure as well. As a result, traders expected the BOC (Bank Of Canada) to side with the dovish outlook and cut rates.
The Big Change?
What was important about the latest GDP figures wasn’t merely that they beat expectations. That happens all the time. The thing is that the growth rate in the first quarter was the same as in the fourth quarter of last year. Canada had been subjected to Trump’s tariffs for two of the three months of the quarter. That trade situation is what led the market to believe that the economy would have slowed down.
But, the fact that it didn’t has left some analysts optimistic that the impact of the trade war was exaggerated. And that the Canadian economy has finally found a bottom. With the help of all the recent rate cuts, then economic activity could start to recover from this point on. Which would make it logical for the BOC to hold rates unchanged, at least for now. The strong GDP number showed that there isn’t an urgent need to cut rates and the BOC (Bank Of Canada) could have some room to wait and see what happens.
It’s Not All Good News
Other economists have been more cautious, noting that most of the growth in Q1 was accrued in January, before the tariffs took effect. Businesses and consumers might have stepped up buying in the first couple of months, which would be reflected as increased economic activity. But that was to get ahead of tariffs, and the impact could be seen with a deceleration in growth in the second quarter.
The question for the BOC (Bank Of Canada) now is which of those views they take. The more positive view is currently in the majority amongst traders. That could leave the CAD gaining against its peers. The minority view that Macklem sticks to his pessimistic view and a now surprise rate cut would likely leave the CAD weaker.
The Different Options
One way to appease both sides would be to hold rates, but heavily imply that easing will continue. With the timing between the rate decision being made public and when Macklem can make it clear that the next meeting is most likely going to be a cut, the market could move around quite a bit.
Central bankers have really embraced the “wait-and-see” attitude around tariffs. But, now that they have been in effect for a few months and real data is coming out, the markets might lose patience with that kind of phrasing. This could lead to an assumption that the next meeting will see a pause.