The Bank of Canada will decide on interest rates at 9:45 am ET on Wednesday with a press conference to follow 45 minutes later.
The implied odds of a rate cut are at 92% and that would bring the overnight target to 2.25%. In a cryptic message in his final comments before the meeting, Bank of Canada Governor Tiff Macklem said they are putting more emphasis on risk when it comes to this decision.
To me that signals a rate cut but also that the forecasts in the report are solid and that inflation is trending towards target. In other words, the forecasts don’t really justify a rate cut but with all the trade uncertainty, it’s prudent to cut in case it worsens.
And it has worsened with Donald Trump announcing fresh 10% tariffs on Canada on the weekend. Now, not many people believe those will actually take place and the loonie completely shrugged off that news but we also didn’t get a long-touted US-Canada trade deal on aluminum and steel that had appeared to be close to completion.
At the same time, Macklem seems to be bracing for downside surprises.
“Growth is not going to feel very good and it’s certainty not going to be enough close the output gap,” he said October 17.
So what next? The market is pricing in a 24% chance of a further cut in December, rising to 64% by March but that’s when the curve flattens out. Said differently, the market thinks that 2.25% on Wednesday will be the bottom or 2.00% within the next 8 months.
The risk this week is that Macklem endorses a pause or hints the BOC has room to cut more-deeply, with a bottom approaching 1.50%. The housing market in much of Canada could certainly use that. A report today showed that just 28 new condos (not buildings, just units) sold in all of Toronto in September. That’s 90% below the 10-year average. It’s not much better in single-family homes with just 283 new sales in the city of 3 million, 61% below the 10-year average.
The year ahead marks the peak of the renewal cycle from the ultra-low rates of 2021 and that’s likely to weigh on consumption. Add in trade uncertainty and it could be rough ride in the year ahead.
The caveat is that the Bank of Canada will be watching November 4 closely. That’s the day former BOC Governor — and current Prime Minister — Mark Carney will deliver his first budget. He’s promised transformational change and some economists are sniffing out a $100 billion deficit. If the government can bend the growth/investment curve, then the BOC may have to reconsider.
Given that, expect Macklem to offer little this week in terms of forward guidance. My suspicion is that a decision that reads as ‘keeping his options open’ and highlighting risks around trade will read as dovish, and be a drag on the Canadian dollar. That said, it’s going to be a tough trade to make because the US Federal Reserve decision comes at 2 pm and the market will be holding its breath until then.
This article was written by Adam Button at investinglive.com.