The Bank of Canada (BoC) voted to keep interest rates unchanged on Wednesday, which came as no surprise to investors. The tone of the policy statement was slightly hawkish, indicating a readiness to increase rates if necessary. This aligns with the bank’s efforts to manage market expectations. The statement also indicated that the bank is still ‘concerned’ about inflation and ‘remains prepared’ to hike rates again if warranted, implying that all options are still on the table.
While in theory this may be true, the facts on both Main Street and Bay Street show a tough slog for the Canadian economy and the average Canadian. Given the lag with which interest rate changes (cuts and hikes) take effect, most economists believe that in practice, cuts are on the way. This also aligns with Governor Macklem’s recent comments that the bank could begin lowering rates before inflation gets all the way back to the BoC’s target of 2 percent.
The question now becomes whether the BoC will cut rates more and sooner than the Fed. The answer, at least according to a Reuters poll, is a resounding ‘YES.’ The latest Reuters poll indicates that the Bank of Canada will begin lowering rates as soon as March of next year and will lower rates by a full percentage point in 2024. Meanwhile, the Fed is expected to keep rates unchanged well into the second half of next year.
If interest rates are higher in the US than Canada this will provide a strong headwind for the Canadian Dollar and will dampen any push by the Loonie. The same Reuters Poll puts the Canadian dollar in the 1.35 range in the next three months and in the 1.31 range in a year.