On Wednesday, the Bank of Canada (BoC) increased its benchmark rate to 5 percent, bringing the policy rate to a level not seen since April 2001. As we had previously mentioned and as astutely pointed out by BMO analysts, the Canadian dollar received an additional boost from today’s Bank of Canada interest rate announcement, as markets had not fully priced in a rate hike. The Canadian dollar is currently trading at 1.3124 against the US Dollar.
Here are some notable takeaways from the bank’s announcement today:
- Inflation is projected to remain above 3 percent until the middle of 2025.
- The BoC is struggling to determine the exact rate that will sufficiently cool the economy without pushing it into a recession.
- The bank did not provide definitive guidance on whether more rate hikes are necessary.
So, what does this mean for the Canadian dollar?
The Canadian economy is considered to be more sensitive to interest rates compared to the more resilient US economy. As a result, the Canadian economy is more likely to experience an economic slowdown sooner and more severely. This potentially allows interest rates in the US to stay elevated for a longer period of time, benefiting the US dollar due to a higher interest rate differential.
Analysts are predicting the Canadian dollar to slide to between 1.37 and 1.38 starting in the second half of 2023 and continuing into the early part of 2024.
