Bank of Canada monetary policy preview

Today Bank of Canada (BoC) is to provide further guidance in policy meet. The result of the monetary policy meeting is scheduled to be announced at 15:00 GMT.

Current policy measures–

• BoC is maintaining overnight deposit rate at 0.5 percent
   

The core objective of BoC monetary policy is price stability which means keeping inflation within a range of 1-3 percent. Headline inflation has fallen close to 1 percent in October last year from 2.5 percent in 2014. Since then it has risen sharply to 2 percentage in January. In February reading came at 1.4 percent. In April it reached 1.7 percent, 1.5 percent in May, 1.3 percent in July, 1.1 percent in August, and 1.5 percent in October.  In January this year, the inflation rose further to 2.1 percent y/y.

Economy at a glance:

• Canada is a very small economy of $1.55 trillion approximately, compared to its larger neighbor, the United States.
• Canada suffered technical recession last year as GDP contracted in both first and second quarter. As of December, annual GDP growth rate has dropped to 0.3 percent from 3.1 percent a year ago. However, it has bounced to 1.1 percent in the first quarter of this year. However, in the second quarter, the economy shrank by 0.3 percent, only to recover by 0.9 percent in the third quarter.
• The unemployment rate is currently at 6.8 percent, at least a percent higher than its long-term average.
• The Canadian housing sector has come under strain in recent times after big price rises in previous years.

Return of growth in the US is expected to help the Canadian economy as a whole. However, President-elect Donald Trump’s trade policies could pose concerns.

What to watch out for –

BoC is expected to keep policy on hold today. The focus will be on what the bank’s take on the inflation and Policies in the United States. The BoC is unlikely to hike rates due to the current state of the economy and won’t cut due to the recent rise in inflation globally.

Some changes in communication would be vital to watch for -

• Changes in the inflation expectation ahead.
• The outlook for oil price and impact on the economy.
• The changes in growth forecast ahead and views on ailing manufacturing.

Impact:

We expect the Canadian dollar to weaken in the short to medium run to as much as 1.4 per dollar but strengthen in medium to longer term to as high as 1.18 per dollar. Key support for the USD/CAD pair lies at 1.28 area and resistance at 1.37 per dollar. The loonie is currently trading at 1.333 per dollar.