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The Bank of Canada (BoC) is expected to leave its benchmark interest rate unchanged at 1.25 percent, since despite all positive signals, a failure of the NAFTA negotiations or even a trade war remains within the realms of possibility, according to the latest research report from Commerzbank.
However, from a fundamental point of view, the BoC has sufficient reason to further hike its key rate. Inflation has reached the middle of its target range and the outlook for the domestic economy is solid.
The NAFTA negotiations so far constituted the main uncertainty factor for the BoC’s positive outlook, as an end of NAFTA would entail considerable negative effects for the Canadian economy. However, the negotiating partners have increasingly signaled that an agreement is possible.
Moreover, the central bank is likely to be interested in ensuring that the Canadian dollar does not appreciate any further against the US dollar. A stronger CAD would not only create downside pressure for inflation but also further reduce the already stricken competitiveness of the Canadian companies.
As the market expects unchanged interest rates it would cause an undesired appreciation of the Canadian dollar against its U.S. counterpart if the BoC was to hike interest rates today. That means the BoC will only continue with the rate hike cycle in the summer and leave interest rates unchanged today.
"It is unlikely to make any major changes to the forecasts in the monetary policy report either, but its tone is likely to move further towards gradual rate hikes and therefore be moderately positive for CAD," the report added.
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