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Bank of Canada monetary policy preview

Today, the Bank of Canada (BoC) is to provide further guidance in policy meet. The result of the monetary policy meeting is scheduled to be announced at 14:00 GMT. The press conference is scheduled at 14:15 GMT.

Current policy measures–

  • Stronger economic rebound and higher inflation have prompted the central bank to raise rate five in 2017. Since July last year, it has hiked five times by 25 basis points each time.

The core objective of BoC monetary policy is price stability which means keeping inflation within a range of 1-3 percent. The headline inflation is currently at 194 percent, it has been showing lots of volatility lately, largely due to energy and food prices.

Economy at a glance:

  • Canada is a very small economy of $1.65 trillion approximately, compared to its larger neighbor, the United States.
  • Canada suffered a technical recession in as GDP contracted in both the first and second quarter of 2015. As of December 2015, the annual GDP growth rate has dropped to 0.3 percent from 3.1 percent two years ago. From there, it bounced back to 3.7 percent in the third quarter of 2017 and declined to 2.9 percent as of the first quarter of 2018. In the second quarter, the GDP growth rate declined further to 1.9 percent in the second quarter. GDP growth has slowed just 1.6 percent y/y in the final quarter of 2018.
  • The unemployment rate has declined to 5.8 percent, lowest since the 2008/09 crisis.

Return of growth in the US is expected to help the Canadian economy as a whole. However, President Donald Trump’s trade policies and lower oil price exerting downward pressure. The newly reached USMCA trade agreement is less favorable to Canada that the previous NAFTA.

Expectation –

Since 2017, BoC policymakers, especially Governor Stephen Poloz stepped up the hawkish rhetoric and suggested that the possibility of a hike remains in play. The governor has followed through his words and hiked five times.

However, he has toned down his hawkish rhetoric as the economy started slowing down in the second half of last year.

No rate hike expected today

Impact:

Since BoC’s suggestions of a rate hike in early June, the Canadian dollar has strengthened from 1.35 per dollar to 1.206 by September, riding on two rate hikes. It has since come under strain over oil price, low inflation, and NAFTA negotiations.

The Canadian dollar has further weakened and currently trading at 1.345 per USD and that is largely due to the strength of the USD. The Canadian dollar is likely to weaken fast, should the central bank hint at the possibility of a rate cut going ahead. Probabilities are on the higher side for such a move.

 

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-1541 %

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2016 bln ARS

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January 31 00:00 UTC 815818815818m

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January 31 00:00 UTC 815818815818m

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2016 bln ARS

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