The consensus for the moment is that the BOC will cut interest rates by 25 bps on Wednesday, just hours before the Fed is projected to do the same. However, that consensus is a bit shaky, given uncertainty around tariffs and trade negotiations. On top of that, inflation data comes out a day before which could shift market expectations. Overall, the conditions are set for some intense volatility in the CADUSD midweek.
The BOC has been on hold for three meetings now, despite deteriorating economic conditions amid the trade war with the US. Inflation has been elevated, in part due to counter-tariffs imposed by the US, which are raising food costs in the short term. Recently, the government moved to waive tariffs, but this was after the data for August had been collected. The market is now betting on high unemployment figures to tip the BOC back into easing despite the trade-driven uncertainty.
A Surprise in Inflation?
Canada’s August headline inflation rate is expected to tick up ot 1.8% from 1.7%. That’s in the bottom half of the BOC’s target range of 1-3%. However, the central bank pays more attention to the core rate, which strips out more volatile elements such as energy and food prices. August Core CPI change is anticipated to remain unchanged at 2.6%, towards the top end of the target range.
Unlike US tariffs that target a range of industrial goods and raw materials, Canada’s tariffs mainly target consumer goods. This means there is a more direct relation between the tariffs and the cost to consumers. On the other hand, they apply primarily to food products, which are excluded from the core inflation rate. Which means the BOC’s concern about tariff-driven inflation has more to do with the potential for prices to pass through to the broader economy. This would minimise the “shock” from tariffs moving the headline inflation rate.
The Potential Market Reaction
Markets have their first chance to react following the CPI figures on Tuesday, if they change the math for whether to expect a rate cut. However, given Canada’s unemployment rate rising to 7.1%, it would likely take a significant beat in the core rate to move market expectations.
What would likely have the most significant impact is whether Ottawa and Washington disclose any progress on the trade negotiation front. Which seems unlikely, given the leading US trade negotiators – Treasury Secretary Scott Bessent and President Donald Trump – will be in Scotland ahead of the rate decision. BOC Governor Tiff Macklem has repeatedly cited the trade war as the main uncertainty around monetary policy.
What Could Surprise The Markets
Regardless of a hold or cut, the BOC is likely to heavily emphasise market uncertainty and not provide guidance for the next meeting. A cut would be in line with expectations from the Fed, and could keep markets stable.
If the BOC holds, there is an outside chance that the Fed might deliver a jumbo cut a few hours later. This would provide a wide interest rate gap between the currencies and generate significant fluctuation. This would be the option for the biggest surprise for the markets.
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