The economists of TD Securities analyze the Bank of Canada’s interest rate decision and its implications for USD/CAD.
Hardline scenario (25%)
Increase of 25 basis points. The BoC rises to 5.25%. The entity remains concerned about the possibility that persistent inflation will delay the normalization of wage and inflation expectations, with the risk of a price and wage spiral. The October MPR still forecasts a soft landing, but the inflation target will take longer to reach. There are no changes to the guidance, but the options remain open. USD/CAD -1.0%.
Base scenario (65%)
Rates remain indefinitely. The Bank of Canada maintains the rate at 5.00% and leaves the door open to further increases. The bank cites widespread evidence that rate hikes are dampening demand, with a sharp cut to 2023 GDP forecasts as the CPI for 2023 and 2024 is revised upwards. The bank is keeping its guidance unchanged, repeating its pledge to new uploads if necessary. USD/CAD -0.2%.
Moderate scenario (10%)
The moderate tone is maintained. He BoC keeps the overnight rate at 5.00%, but notes that the window for increases has likely closed. The statement notes that raising interest rates has worked, that excess demand is rapidly disappearing and that the economy is heading toward a mild recession. The revised guidance indicates that the BoC will continue to assess the inflation outlook, but does not repeat its promise to raise rates again if necessary. USD/CAD +0.5%.
Source: Fx Street
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