With a major central bank decision coming up, I think it’s time for another edition of my Forex Trading Guide! Let’s take a look at why the Bank of Canada interest rate decision matters, what happened before, and what might happen this time.
Why is this event important?
If you’ve been a good student in our School of Pipsology, you’d know that monetary policy and interest rate expectations one of the biggest drivers of forex price action. Tightening monetary policy by hiking interest rates or reducing money supply tends to lead to currency appreciation while policy easing by cutting rates or boosting liquidity usually results in currency depreciation.
With that, the Bank of Canada’s upcoming interest rate statement could have a strong impact on the Canadian dollar, especially if Governor Stephen Poloz and his men announce a change in economic outlook or policy bias.
What happened before?
In their previous rate decision, the BOC kept interest rates on hold at 1.00% and maintained its neutral policy stance. Based on the tone of their statement, Poloz and his men don’t seem inclined to tighten monetary policy anytime soon, citing that the slack in the economy would be enough to keep inflation in check.
In addition, BOC policymakers noted that the pickup in inflation might just be due to temporary factors. Recall that Canada printed two consecutive months of stronger than expected CPI readings, although the gains were attributed to the Loonie’s recent depreciation.
What is expected this time?
It’s likely that the BOC will once again stick to its neutral stance for the time being, reiterating that things might stay this way for a long time and downplaying the fact that annual inflation is still above the central bank’s 2% target.
Keep in mind that other major central banks, such as the BOE and the Fed, have decided to shift to a more cautious policy bias since risks to global economic growth have resurfaced. BOC officials might also zoom in on how this might affect the Canadian economy and possibly mention that falling oil and energy prices might hurt growth.
Although Canada has had its share of impressive economic figures lately, particularly in retail sales and exports, Governor Poloz and his men might not be too keen to veer from the pack and suggest that a rate hike might come sooner than expected. In fact, the BOC would rather have a weaker Canadian dollar in order to spur export activity, which means that talking about rate hikes probably ain’t on their agenda.
A cautious policy statement might not be enough to trigger Loonie selling, but a very dovish set of remarks just might. Better keep your eyes and ears peeled during the actual event on Wednesday 3:00 pm GMT!