Bank of Canada poised for another interest rate cut, with investor focus on policy direction – Crypto News – Crypto News
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Bank of Canada set to trim interest rates, investors focus on future policy stance Bank of Canada set to trim interest rates, investors focus on future policy stance

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Bank of Canada poised for another interest rate cut, with investor focus on policy direction – Crypto News

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  • The interest rate in Canada is set to be lowered by 25 bps to 4.50% on Wednesday.
  • The Bank of Canada Governor Macklem’s words will be closely scrutinized for further policy cues.
  • The Canadian Dollar is primed for a big reaction to the BoC policy announcements.

The Bank of Canada (BoC) is widely anticipated to lower its key interest rate by 25 basis points (bps) from 4.75% to 4.50% at its monetary policy meeting on Wednesday, July 24. The Canadian Dollar (CAD) is primed for a big volatility spike in reaction to the BoC policy announcements.

Bank of Canada set for another interest rate cut

The Canadian central bank is seen cutting rates for the second consecutive meeting and the decision will be announced at 13:45 GMT. Governor Tiff Macklem’s press conference will follow at 14:30 GMT.

In June, the BoC delivered its first interest-rate cut since a series of hikes that began in March 2022, slashing rates by 25 bps from 5.0% to 4.75%, as the central bank felt confident that inflation will continue to move towards the 2% target.

Governor Tiff Macklem mentioned that it is reasonable to expect more rate cuts if inflation continues to ease. 

Since then, inflation in Canada slowed down further, with the headline annual Consumer Price Index (CPI) rising 2.7% in June, cooler than the BoC’s 2.9% inflation forecast for the end of the first half of 2024.

“Month-over-month, the consumer price index was down 0.1%, compared with a forecast for no change. Statistics Canada data showed this was the first deceleration in the monthly inflation rate since December,” according to Reuters.

Loosening Canadian labor market conditions also cemented the case for another rate cut in July. The country lost 1,400 jobs in June while the Unemployment Rate rose to 6.4%, Statistics Canada reported earlier this month.

Markets are currently pricing in a 92% probability of a rate cut this week, with another cut also on the table later this year.

How will the BoC monetary policy decision affect USD/CAD?

As the rate cut is fully baked in, markets will closely scrutinize the language in the policy statement and Governor Macklem’s words for the bank’s next interest rate move. At the presser following the June policy meeting, BoC Governor Tiff Macklem said that “the timing of any further cuts will depend on data.”

Amidst sticky core inflation, it remains to be seen if the BoC adopts a prudent approach while hinting at the policy outlook in the coming months. In case the BoC cautions on the inflation outlook, the Canadian Dollar could receive a much-needed respite, as it would imply that the central bank could rein in its easing cycle.

If the bank acknowledges progress in disinflation and intends to lower rates further, the CAD may see an extension of the ongoing downtrend in the near future.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers key technicals for trading USD/CAD on the policy outcome.

“The USD/CAD pair is sitting at the highest level in six weeks at 1.3775 in the lead-up to the BoC showdown. Buyers appear to be biding time before the next leg higher, as the 14-day Relative Strength Index (RSI) stays firm above the 50 level while a Bull Cross remains in the making. The 21-day Simple Moving Average (SMA) is on the verge of crossing the 50-day SMA for the upside, which if realized daily closing basis will validate a bullish crossover.”

“On a renewed upside, USD/CAD could initiate a fresh advance toward the 2024 highs of 1.3846. Ahead of that, the 1.3800 barrier needs to be taken out decisively. The next target for buyers is aligned at the 1.3900 round level. Conversely, strong support is seen at around 1.3680, where the 21-day and 50-day SMA converge. Acceptance below that level will put the 100-day SMA of 1.3630 to the test. The last line of defense for USD/CAD optimists is at the 200-day SMA of 1.3595,” Dhwani adds. 

Central banks FAQs

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.

 

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