The Bank of Canada (BoC) holds its first meeting of 2024 today and is widely expected to keep its interest rate at 5.0%. Investors will closely watch the BoC Monetary Policy Report, while potentially dovish comments from bank officials could weigh on the Canadian dollar (CAD).
What to expect
Later on today, the BoC is anticipated to keep its policy rate at 5.0% for the fourth time in a row. The CAD has declined significantly since the beginning of the new year against the US dollar (USD), and while the bank’s decision may not hold any surprises, the bank’s commentary could be crucial in determining the direction of the CAD.
The central bank is also expected to be cautious, following the release of Canada’s inflation figures in December, which saw consumer prices unpredictably rise 3.4% in the last year. While the central bank may revise lower its GDP forecasts, the possibility of further rate hikes is still on the table.
BoC Governor Tiff Macklem explained that the Governing Council has highlighted the importance of being ready to act and increase the rate if necessary. Macklem also stated that by the end of 2024, the bank should be closer to the 2% inflation target.
How will the BoC’s monetary policy decision affect USD/CAD?
The Bank of Canada will release its policy decision at 15:00 GMT on 24 January and will proceed to publish the bank’s Monetary Policy Report (MPR). While the impact on the Canadian currency is expected to be limited, a hawkish or dovish stance and commentary may move the CAD. On the one hand, a hawkish hold could weaken the USD/CAD pair, while a more dovish stance could strengthen the USD/CAD.
Economists at Commerzbank agree that the actual interest rate decision won’t be exciting as the BoC will likely leave rates unchanged. While this is not surprising, a small probability for the first-rate cut is priced in.
If the BoC’s statement and Governor Tiff Macklem’s comments at the meeting afterwards can persuade the market of their continued careful and thoughtful approach, the CAD could find support.
However, considering the rate cuts that may follow in the coming months, there is a high chance that potential dovish comments may add more pressure on the CAD.
3 potential scenarios
Economists at TD Securities have provided three scenarios to have in mind in today’s meeting. In the first one, which is the most likely (70%), the bank may be slightly hawkish and leave the rate at 5.00%. It may express its concern about persistent price pressures and keep the door open for rate hikes. This could help support the CAD and weaken the USD/CAD pair.
In a second scenario, where the bank appears dovish (25%), analysts expect the rate to remain at 5.00% but the bank may provide some commentary about rate cuts with dovish changes to forward guidance and no mention of further hikes. Additionally, if the accompanying statement highlights concern around price pressures and they provide a potential timeline for cuts, then the CAD will weaken.
In a more dovish scenario (5%), the rate will stay at 5.00% but there is no reference to rate hikes and guidance is unclear. The statement may stress potential risks and highlight cooling inflation, which will significantly weaken the CAD and boost the USD/CAD pair.
Finally, perhaps rate cuts are premature. Because Canada’s inflation is anticipated to remain stickier than the US, any decision for rate cuts may be postponed for now, while the BoC is expected to follow the Federal Reserve when it comes to delivering the first rate cut this year.