The Bank of Canada decided to keep monetary policy unchanged in this week’s rate statement, but how likely are they to cut interest rates soon? Based on their latest announcement, here are some signs that the Canadian central bank might be ready to ease.
1. Weak inflation outlook
During the press conference, BOC Governor Poloz mentioned that the central bank is becoming increasingly worried about subdued inflationary pressures. Policymakers downgraded their inflation forecast to just 1% for the first half of the year and projected that it will take at least a couple of years before the annual CPI reaches the central bank’s 2% target.
It doesn’t help that global disinflation remains a huge concern for central bankers, after the U.S. Federal Reserve recently decided to taper its bond purchases. Bear in mind that reducing the amount of cash in circulation could translate to downward pressures on price levels as you get more bang for your buck.
2. Slowdown in exports
When exports are weak, policymakers are quick to blame the local currency. After all, an appreciating currency means that the country’s exports become more expensive in the international market, thereby hurting demand.
What’s particularly interesting about Poloz’s recent statement regarding the “strong” Canadian dollar is that the Loonie has already weakened considerably in the past few months! This suggests that the BOC still wants to see an even weaker Loonie and might use a rate cut to spur currency depreciation.
3. Bleak economic data
As I mentioned in my recent blog post on reasons why the Loonie could fall further, the Canadian economy has had more than its fair share of disappointing economic figures recently. From weak manufacturing readings to poor jobs figures, data from Canada has been consistently in the red so far.
It’s no surprise that market analysts have concluded that the Canada is in the middle of an economic slowdown. As we’ve witnessed in the past, weak hiring could lead to a downturn in consumer spending, which could then weigh on manufacturing and production later on. With that, many are expecting the BOC to start easing in hopes of ending this potential cycle of economic weakness.
4. Poloz (almost) said so!
According to the Governor Poloz, the next interest rate move could either be up or down, depending on how economic data turns out. Oh come on, it’s not like anyone is buying the idea that the BOC could implement a rate hike given the bleak inflation outlook, economic slowdown, and strong Loonie! Puh-lease.
Perhaps Poloz simply didn’t want to spark sudden moves in the forex market or he was trying to manage market expectations. Those who tuned in to the event confirmed that the BOC was as dovish as it could be without implementing an actual rate cut… for now.
Traders might start pricing in expectations of a rate cut for the next BOC monetary policy decision, which suggests that the Loonie might be in for more losses in the coming weeks. Of course this depends on whether or not economic data magically surprises to the upside and reflects the resilience of the Canadian economy.
Do you think the BOC will cut rates in their next policy decision? Let us know by voting through the poll below!