Bank of Canada Expected to Ease Rates
As the market anticipates a potential rate cut by the Bank of Canada, investors are closely watching the developments in the economy. The reasoning behind this move is the recent slowdown in inflation below target levels, coupled with a softer growth outlook. ING’s FX expert, Francesco Pesole, highlights that there is a possibility of a 50bp rate cut to bring rates to a neutral level, although a 25bp cut remains slightly more likely.
Factors Influencing the Decision
- Core inflation measures have not shown further decline in September.
- The labor market has displayed strong gains with a decrease in the unemployment rate.
- The BoC Business Outlook indicates a potential recovery in future sales expectations.
Complexities in Decision Making
The decision by the Bank of Canada is further complicated by the recent shift in Fed rate expectations, with some members expressing skepticism about consecutive rate cuts. While the BoC asserts its independence, maintaining a significant gap with US rates could have adverse effects on the Canadian dollar. A prolonged depreciation in CAD could lead to increased imported costs, impacting the overall economy.
Implications for the Loonie
If the BoC opts for a 50bp rate cut, it may be to align with market expectations. However, Governor Macklem may be cautious about endorsing aggressive rate cuts. Despite the potential impact on the Canadian dollar, the currency is expected to outperform other commodity currencies leading up to the US election due to lower exposure to certain risks associated with the current political climate.
Analysis and Outlook
Overall, the macroeconomic factors and the recent Fed recalibration suggest a 25bp rate cut by the Bank of Canada. While the loonie could face volatility in response to the decision, there is a potential for CAD to perform well against other currencies, particularly in the lead-up to the US election. Investors should closely monitor the central bank’s decision and its implications on the Canadian economy.