Photo by Michelle Spollen on Unsplash
 

The Canadian economy has not remained unaffected from high inflation figures combined with high borrowing costs. The Bank of Canada (BoC) was one of the first to raise its interest rates in order to combat inflation, with the tight monetary policy affecting the Canadian dollar. As the Canadian economy is closely related with its US neighbor, developments coming from the Federal Reserve could play a role in how the BoC will adjust its strategy.

In this article, you will have the opportunity to read more about the Canadian economy, the Canadian dollar and what do analysts forecast.
 

BoC Keeps Rates On Hold In March Meeting

On Wednesday March 6th, the BoC governing council convened to decide on interest rates. The announced decision said that borrowing costs would remain on hold as it was largely expected by market analysts. The BoC first raised interest rates in March 2022, following up with 10 rate hikes in less than 24 months.

The BoC’s governor Tiff Macklem stressed that lowering inflation close to target is a priority. "We don't want to keep monetary policy this restrictive for longer than we have to. But nor do we want to jeopardize the progress we've made in bringing inflation down," he mentioned in his post-meeting remarks.

Just four weeks before the federal budget presentation, the BoC’s head commented on the housing funding issue that’s troubling the Canadian economy. “If everything else in our projection was the same and housing was stronger and government spending was stronger, growth would probably be stronger and there would probably be less downward pressure on inflation. So, that is something we would have to take into account when we consider our interest rate setting,” he noted.
 

Canadian Economy: Evades Recession With Weak Economic Growth

Statistics Canada reported on February 29th that Canada’s real gross domestic product increased by 1% on an annualized basis, beating all forecasts, including the BoC’s, for the final quarter of 2023.

The report mentioned that growth in the fourth quarter was driven by a surge in exports, while housing and business investment both fell. It was also noted that economic growth in 2023 rose at its slowest pace in the last seven years.

The Parliamentary Budget Office (PBO) predicts slow economic growth in the next year of less than 1%, before the growth rate picks up again in 2025. On March 5th, PBO’s analysts said that “sluggish economic growth, I think is our best estimate, at this point with the information that we have right now, but there could always be surprises.” They also suggested regarding interest rates that “if the BoC is delayed or takes more time, before it starts to decrease the rate, that could act as a drag on economic growth.”
 

What Do Analysts Think About The Canadian Dollar

Let’s see what economists forecast regarding interest rates and the Canadian dollar’s outlook for the next quarters.
 

ING: Rate Cut After June?

Analysts at the Dutch ING bank suggest that the BoC’s policymakers will likely not move aggressively when it comes to interest rates until the beginning of summer. In their report published on March 6th, they note: “It is unlikely that the BoC will be comfortable enough to loosen policy at the next meeting on 10 April, but we do see a decent chance of interest rate cuts starting to come through from the 5 June meeting onwards. The effects of previous rate hikes are still feeding through since Canadian mortgage rates continue to ratchet higher for an increasing number of borrowers as their mortgage rates reset after their fixed period ends. This will intensify the financial pressure on households, dampening both consumer spending and inflation.”

(Click on image to enlarge)

Depicted: Admirals MetaTrader 5 - USD/CAD Daily Chart.
Date Range: September 1st 2023 – March 11th 2024. Date Captured: March 11th 2024. Past Performance is not an indicator of future results.

ING specialists suggest that headline inflation could drop back to 2% in the second half of this year rather than in 2025, disagreeing with the BoC’s projections. The report forecasts that the Canadian dollar could be trading close to the $1.30 mark against the US dollar in the second half of this year.
 

Commerzbank: Upside Potential For the “Loonie”?

Commerzbank’s economists suggest that there might be upside potential for the Canadian dollar, nicknamed “Loonie” by traders, in the next few months. Analysing the CAD/USD pair outlook, after the BoC’s rate decision, they wrote: “The BoC left its key interest rate unchanged at 5%. At the same time, the BoC continued to emphasize that it is too early to talk about rate cuts. The statement also kept the reference to ongoing risks for the inflation outlook. Overall, this was a fairly hawkish decision. Some market participants were expecting a more dovish tone in the statement. The fact that the BoC did not deliver reinforces our view that the BoC is unlikely to cut rates until after the Fed. We therefore continue to see upside potential for the CAD in the coming months.”

(Click on image to enlarge)

Depicted: Admirals MetaTrader 5 - USD/CAD Monthly Chart.
Date Range: January 1st 2013 – March 11th 2024. Date Captured: March 11th 2024. Past Performance is not an indicator of future results.
 

CIBC: Weak Economic Growth, Wait For April Report

As the Canadian dollar gained ground, drawing strength from the BoC’s monetary policy stance, market analysts at CIBC didn’t neglect to mention that economic growth is still weak although figures are better than anticipated. In their report they mention that the next month’s Monetary Policy Report could shed some light, adding the following: “look for greater clarity to come in April’s Monetary Policy Report, which in addition to a fresh forecast, should show enough optimism in the battle against inflation to set markets up for a rate cut in June, assuming the data in the coming month point in that direction. But for now, the overall message is that it's too early to cut, and that they need to see more progress on inflation.”

More By This Author:

ECB To Decide On Interest Rates, Eyes On NFP Report
RBNZ Keeps Rates On Hold, US GDP, Eurozone HICP In The Spotlight
RBNZ: To Raise Or Not To Raise Interest Rates?