Wait and see with the CAD until the BoC starts to cut rates – Commerzbank

The Bank of Canada (BoC) left rates unchanged again. The question is when rates can be lowered again. Economists at Commerzbank analyze Loonie’s outlook after the BoC’s decision.

Interest rate hikes off the table, but no rate cuts yet

The BoC left interest rates unchanged yesterday. Anything else would have been quite a surprise. At the same time, it sent some dovish signals. 

At the press conference, Governor Tiff Macklem emphasized that it was too early to talk about the exact timing of the first rate cuts. However, the mere suggestion that rate cuts are likely to become increasingly important in the coming months was quite dovish and put pressure on the CAD.

The decisive factors for the timing are likely to be persistent inflation and high wage growth. The BoC expects wage growth to slow in the coming months. Officials also want to see a further and, above all, sustained decline in core inflation. Recently, however, core inflation has been extremely stubborn and has fallen only in small steps, if at all, toward the target. So there is still a lot of work to be done before the BoC starts to cut rates, possibly from the middle of the year. Until then, we will have to wait and see with the CAD.