Bank of Canada policy meeting: stick to the guidelines for now

The Bank of Canada will likely stick to the script at 14:00 GMT on Wednesday, announcing another giant rate hike to contain inflation. The Canadian dollar, however, may not react aggressively as investors priced in the rate announcement, as they also expect further hikes in the coming months. That said, any warning about the downside the rate hike cycle could bring, particularly in the housing market, could still generate some volatility.

Another sharp rate hike expected

The Bank of Canada (BoC) intensified its fight against inflation in April, making a double rate hike of 50 basis points at its previous policy meeting and entering the phase of quantitative tightening after a normal increase of 25 points. base the previous month. Despite this, the uninterrupted Ukrainian war and the exchange of sanctions between Russia and the rest of the world have further exacerbated supply jitters and caused a new wave of inflation, pushing the headline CPI to a new three-point high. decades of 6.8% y/y in April. . Rising food prices were even more pronounced and imported inflation spilled over into domestic markets as well, sparking speculation that similar aggressive rate hikes would follow, while some analysts warned. even criticized the central bank for having delayed launching the tightening phase. .

Governor Tiff Macklem did not rule out similar rate hikes in the future, saying borrowing costs may need to break above the neutral 2-3% range for some time to bring inflation back to target. . As a result, investors have become almost certain that the central bank will repeat June’s all-important 50 basis point rate hike to 1.50% and not stop there, with futures markets pricing in at least another 50 basis points in the coming months.

BoC sticks to forecast despite recession fears

The above policy decision, however, will come at a time when traders are grappling with uncertainty over whether the rapid monetary tightening campaign will result in a soft landing or end in an economic recession. Discouragingly, the housing sector, which is closely watched in Canada’s debt-ridden economy, has started to show signs of weakness as the household debt-to-disposable income ratio fluctuates at a record high in Q4 2021. Specifically, home sales fell 12.6% m/m in April for the first time in two years and the house price index fell slightly but remained strongly elevated on a year-over-year basis.

Subsequently, quarterly GDP growth figures on Tuesday created some discomfort after showing a below-expected annualized expansion of 3.1%, although the data did not change expectations for a rate hike, the domestic consumption having accelerated thanks to the rise in labor compensation, offsetting the decline in exports due to temporary supply constraints in the oil sector. The private savings rate also rebounded, although it remained comfortably below the pandemic peak.

Overall, the Canadian economy is still in good shape and although the shrinking labor pool may add constraints to economic growth, the Bank of Canada will likely wait for more data proving that its aggressive strategy hurts the economy before changing course.

Therefore, given the status quo, policymakers are likely to stick to the rate hike plan and avoid any serious change in language, and in particular the word recession, as investors are sensitive to any change in the economic outlook. .

USD/CAD

As for the dollar/loonie, the pair is facing resistance around the 200-day simple moving average (SMA) and the 1.2665 level. For the pair to rebound above 1.2700, the central bank will need to adopt a less hawkish tone, signaling the potential negative economic effects of rate hikes and paving the way for a slower rate hike path sooner than expected. predicted by analysts.

Otherwise, if the BoC undermines the latest housing market deceleration in confidence that the economy can absorb further strong rate hikes over the coming year, the dollar/loonie could dip below the 1.2630 support region. at 1.2600 and towards the number of 1.2500.

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