Post USMCA, Bank of Canada expected to bump interest rates

It seems like a foregone conclusion, but the Bank of Canada is expected to raise interest rates Wednesday. The market is expecting a 25 basis point hike to 1.75%, which would be the fifth increase since July, 2017.

Bank of Canada Governor Stephen Poloz will address the Canadian economy that’s been tempered in the past by the ongoing NAFTA 2.0 talks.  With the USMCA agreement awaiting government approval, questions will centre around the outlook moving forward.

It’s about the tone of the comments:

  • Analysts will be listening to the tone of Poloz’s comments and whether they become more optimistic about the economy post-USMCA deal.
  • Deutsche Bank senior U.S. economist Brett Ryan says, “the BoC should increase its 2018 real GDP growth forecast by 20 basis points (to 2.2 per cent) as our Q3 tracking estimate points to 2.1-per-cent inflation-adjusted output growth, a bit above the 1.8-per-cent projection that the bank had pencilled in previously”

Everyone is watching the Canadian dollar

“The most interesting aspect of the upcoming announcement may be that the Canadian dollar is trading at the lower end of its recent range,” says Matthew Pot, economist with Grain Perspectives.

  • The NAFTA negotiation drag was felt throughout the negotiation period, but the dollar has not sparked higher post agreement.
  • In the last month the Canadian dollar has slumped lower to 0.76249 which is down -0.01109 (-1.43%).
  • Year-to-date in 2018, the Canadian dollar is down -0.03179 cents (-4.00%)

The Canadian interest rate decision is transpiring at a time where there is even more focus on the U.S. Federal Reserve decisions going forward. The White House has certainly put pressure on the fed to keep rates steady, as Canada watches closely.

“On Wednesday an interest rate hike is a certainty,” Pot says “South of the border interest rate outlooks remain aggressive. The question for the Candian dollar will be how quickly Canadian rates increase relative to the United States. As such, the ‘tone’ of the announcement will give the market some context to trade these expectations on. This is what will matter on Wednesday.”

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