The Bank of Canada (BoC) is widely expected to cut its policy rate by 25 bps. The Canadian dollar (CAD) has remained indecisive, but analysts expect the Loonie to weaken if the central bank proceeds with a rate cut later today. It will be the first rate cut after the bank kept rates unchanged at 5.00% in six meetings in a row.
The Bank of Canada will announce its policy decision at 13:45 GMT, with Governor Macklem’s press conference to follow at 14:30 GMT.
Will the bank deliver a rate cut?
Since the beginning of the year, the Canadian dollar has been progressively subdued against the US dollar, although for the past couple of months, it appears to be rangebound, without a clear direction.
In April, annual domestic inflation (headline CPI) dropped further, and Core CPI came in at 1.6% annually, which is below the bank’s desired target of 2%. Perhaps, the central bank’s decision to potentially cut interest rates would be guided by the decline in consumer prices and the slowdown of the labour market.
The BoC is expected to continue with its data-dependent approach when it comes to its interest rate decisions. As of now, money markets estimate a 30 basis points cuts in July and nearly 42 basis points in September. The BoC is likely to remain careful, monitoring inflation and analysing upcoming data.
Will the bank be dovish or hawkish?
The bank’s stance is anticipated to be on the cautious side and reflect its focus on data to determine future moves. In fact, BoC’s Governor Tiff Macklem who made his presentation to the House of Commons Finance Committee early in May responded by indicating that while there is a limit to how much the US and Canadian central banks can diverge on interest rates, this limit has not yet been reached.
In addition, when appearing before the Senate banking committee on the same day in May, Macklem noted that inflation was easing and said that Canadians wanted to know when the central bank would begin lowering interest rates. He concluded by saying that the short answer to the specific question was that progress is being made. During the last rate meeting, Macklem also said that a June rate cut would be “within the realm of possibilities.”
Will the BoC’s decision impact the USD/CAD?
While the interest rate move may not affect the CAD, the bank’s message will be more influential. This is because if the bank sounds more conservative, then the CAD will strengthen and the USD/CAD will decline. There is also a possibility that if the bank indicates it wants to continue lowering interest rates further, the Canadian dollar will weaken. If the Canadian central bank does lower its borrowing costs, this could widen the divergence of policy rates between the BoC and Fed, which will weigh on the greenback. Meanwhile, higher crude oil prices could weigh on the commodity-linked Loonie, as Canada is the largest oil exporter to the US.