BoC to remain on hold

As a direct neighbour and thus the major trading partner developments in the US are of particular relevance for the Canadian economy and therefore for the Bank of Canada's (BoC) monetary policy. At present this is causing mixed feelings for the BoC. Most recently it was forced to lower its key rate as a result of the strong fall of the oil price (its most important export good), says Commerzbank. 

Considering that the fall has continued recently as a result of the turbulence in China one might assume that the BoC is thinking of further rate cuts, but on the other hand it also has to consider developments in the US. For a while now the BoC has been hoping that the economic recovery in the US will support the Canadian economy outside the energy sector and will therefore cushion the negative effects of the low oil price. 

"In addition to strong demand from the US the weak CAD is also likely to have supported this development. That means that Fed rate hikes would have a twofold effect. Over time they would dampen the US economy, but would also tend to weaken CAD further against USD thus supporting the Canadian export sector. The only contribution the BoC then has to make is to keep still and leave its key rate at record lows and leave the rest of the work to the Fed. That is exactly what we expect the BoC to do today - as does the majority of the market", states Commerzbank.