Bank of Canada unlikely to raise rates at today’s meeting

Today, 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 15:00 GMT. No Press conference is scheduled.

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 2.4 percent, it has been showing lots of volatility lately, largely due to energy 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.
• The unemployment rate has declined to 5.8 percent, lowest since the 2008/09 crisis.
• The Canadian housing sector has come under strain since last year after big price rises in previous years.

Return of growth in the US is expected to help the Canadian economy as a whole. However, President Donald Trump’s trade policies are posing concerns, along with his other policy uncertainties. Good news is that Canada has reached a trade agreement with the United States on the sidelines of last week’s G20 meeting.

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.

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. Moreover, Canadian crude, known as West Canada Select (WCS) is trading at large ($49 per barrel) discount to Brent.

The recent strength of the U.S. dollar has pushed the Canadian dollar to 1.329 per dollar as of today.

Since the focus will be on future guidance, the movements would depend on wordings.  The main focus will remain on geopolitical tensions amid tightening monetary policies around the world.  The Canadian dollar is expected to continue to remain trapped in a Bull/Bear fight, where bulls are eying 1.17 per U.S. dollar and bears are eying 1.44 per USD.