Upcoming Bank Of Canada Rate Decision

This is a pretty busy week for the CAD. Tomorrow’s rate decision is just the first of several major data points that could move the currency. There is an overwhelming consensus that the BOC will keep rates on hold one more time. But there is also a growing number of analysts who think monetary policy is out of step with reality. So, hold, but maybe more of a dovish tone in the statement.

The latest data – key among them Q3 GDP – has been in line with the central bank’s views and market expectations. Basically, the economy keeps running at the same pace as earlier in the year, with similar results. The trouble is, it’s below historic trends, and is causing increased pressure on regulators to do something.

The Market Reaction

What we’ll be looking for is any indication in the Rate Statement that what is called an “insurance cut” is being considered by the Bank. So far, Governor Poloz has been adamant that policy has been adequate, keeping a neutral stance. We’d also be very interested in any hints that the bank sees future risks.

The “insurance policy” rate cut implies the BOC doesn’t believe there are any fundamental difficulties in the economy. But, most of Canada’s trade partners have been cutting rates. The bond yield differential increases capital costs for domestic companies as well as makes it more difficult for exporters. With CAD gaining strength during the last month, the bank might want to signal that they are considering policies that would keep it from getting too strong.

The Outlook in the Longer Term

The latest survey among economists shows that there is a small majority who expect that there will be a rate cut at the first meeting of next year. However, spreads so far show that the market isn’t pricing it in yet. The majority gets a little bigger when asked about the chance of a rate cut in the first quarter of next year. However, most characterize this as a “bullish cut”; and that even if the bank does pull the trigger, they will be adamant that it is not starting a cut cycle.

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