BoC: Holding Rates Steady but Keeps Options Open for Future Hikes

Financial markets and economists anticipate that the central bank will maintain the Official Overnight Rate (OOR) at 5.0% for the second consecutive meeting. This expectation is strongly reflected in market pricing, with an 85% probability favoring another pause. Remarkably, market projections extend until late 2024, indicating a prevailing belief in a prolonged period of rate stability. There are currently no expectations for rate cuts or hikes, indicating a clear bias towards a sustained higher rate environment.

The decision to raise interest rates reflects the Bank of Canada’s acknowledgment of persistent excess demand and underlying inflationary pressures. The consensus among governing councils is that adopting a more restrictive policy stance is necessary to guide inflation back to the desired 2% target. While there were discussions considering keeping rates unchanged, the governing councils evaluated the costs of delaying action against the benefits of waiting. Ultimately, the consensus leaned towards implementing timely measures to address inflationary pressures.

With consecutive rate hikes in June and July, the Bank of Canada cautiously anticipates that inflation will gradually revert to the 2% target. Canadian Dollar (CAD) traders should vigilantly monitor incoming inflation and labor market data. Any deterioration in job and inflation figures might weaken the CAD. Conversely, further improvement in employment and inflation data could bolster the CAD.

On Wednesday, the USD/CAD pair faced selling pressure, moving further away from its recent peak around the 1.3670 region, which was reached on the previous day and marked the highest level since March 28. Despite this, spot prices remained defensively positioned as the European session approached, and any substantial corrective decline appeared elusive. The recent surge in crude oil prices has supported the Canadian Dollar, which is linked to commodities. A slight retreat in the US Dollar from its six-month high also added some downward pressure on the pair.

This decline in the USD/CAD pair is partly attributed to the recent bullish trend in crude oil prices. A surprising move on Wednesday reinforced this uptrend, as Saudi Arabia and Russia extended their voluntary supply cuts until the end of the year. This decision, coupled with the anticipation of OPEC+ extending output cuts until the end of 2024, has raised concerns about a tightening global supply, further influencing market dynamics.

As we get closer to the release time, here are the expectations as forecast by the economists and researchers of major banks regarding the upcoming announcement.

Wells Fargo

With inflation more firmly on a downward trajectory and the economy showing signs of deceleration, we feel more comfortable now saying Bank of Canada interest rates have peaked and additional rate hikes are unlikely to be delivered. We also expect this message to be communicated at the central bank’s October monetary policy assessment. In our view, policy rates in Canada are on hold until Q2-2024. Once the easing cycle is initiated, we expect BoC policy rates to continue lower over the course of 2024 and into 2025, eventually reaching a terminal rate of 3.00% by Q1-2025.

Citi

We think the outcome of the October BoC decision is still a very close call, but softer September CPI data this week pushed the balance of risks from a hike to another pause. The retracement of strong core inflation from August could raise enough doubts about whether policy rates definitely need to be higher. However, with rates unchanged at 5.0%, guidance should remain that rates could still rise further, and could possibly even be updated to reflect that the chance of another hike has risen. We would not rule out the possibility of a rate hike in December, especially as there is just one more CPI print released ahead of that decision.

CIBC

We look for the BoC to keep the overnight rate on hold at 5%. The statement will cite the ample evidence that economic growth has been curtailed by the rate hikes delivered thus far. We don’t share the Bank’s worry that inflation will prove sticky in the face of an evident economic slowdown, as it’s too soon in the move from a tight economy to one with slack to have expected to see a drop in price pressures tied to domestic demand. But we sense that those worries, and references in the statement to the lack of downside momentum in key core inflation metrics, will see the Bank maintain a somewhat hawkish tone, with the statement’s conclusion leaving the door open to further hikes if we don’t see progress towards the 2% target in the months ahead.