The Bank of Canada (BoC) is set to announce its interest rate decision today, Wednesday, 7th of June at 14:00 GMT. The BoC is expected to maintain key interest rates at 4.5% but may indicate willingness to hike rates further if needed. The updated macro forecasts will be released later in the July meeting. The Canadian dollar (CAD) is anticipated to be volatile in response to the BoC’s rate outlook.
Canadian economy remains strong
The Bank of Canada (BoC) is set to keep interest rates unchanged at 4.5% for the third consecutive meeting on Wednesday, after being the first major central bank to pause hiking interest rates in March.
Ahead of the BoC monetary policy announcement, the USD/CAD remains weak, after struggling the last two weeks, with the Canadian dollar finding support due to rising oil prices. The CAD has also found support due to Canada’s strong economic performance. Canadian Gross Domestic Product (GDP) grew 0.8% QoQ. Inflation rose sharply in April, with annual Consumer Price Index (CPI) rising 4.4% in April, compared with March’s 4.3% increase.
Bank of Canada interest rate expectations
With headline consumer inflation rising and the economy remaining strong, the BoC will be pressured to hike rates. However, markets are pricing a 60% probability of the Bank remaining on hold.
Some banks expect the BoC to deliver 50 bps rate hikes by September while some others are speculating that the BoC will return to its tightening cycle in September. Markets will closely watch Friday’s May employment report to adjust rate hike expectations in the second half of this year.
Analysts at TD Securities (TDS) anticipate the BoC to hike by 25bp in June, and 25bp in July. With economic data remaining resilient, they expect a hawkish statement, and the Bank indicating the possibility of further rate hikes in the coming months.
ING believe the Bank will remain on hold, but due to high inflation and robust GDP and labour data, they also note the possibility of a surprise rate hike. The CAD will remain supported even if the BoC remains on hold but strikes a hawkish tone.
Wells Fargo, NBF and RBC Economics anticipate the BoC to remain on hold and maintain the pause in hikes, but NBF notes that surprises are not excluded.
How will the USD/CAD react?
If the BoC maintain rates at 4.5% but indicates a 25 basis points (bps) July rate increase, the CAD will rise. Similarly, the USD/CAD pair will be under pressure if the central bank surprises with a 25 bps rate hike to 4.75%. The CAD could weaken if the BoC holds rates and is unclear about its future policy plans.