The decision to pause was widely expected, given that Canada’s economy is stalled, and inflation has been falling. The BoC, while acknowledging that the economy is weak, nevertheless retained its hawkish bias in its rate statement.
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BoC Rate Statement
Inflation Risk Remains and Rates Could Go Higher
The BoC Rate Statement said that the “Governing Council is still concerned about the risks to the outlook for inflation and remains prepared to raise the policy rate further if needed.” This was a clear and direct warning that the BoC remains concerned about high inflation and that rate hikes remain on the table.
Despite the BoC’s hawkish message to the markets, it appears unlikely that the central bank will resume its rate hikes, barring the unlikely scenario that inflation reverses directions and moves upwards.
If the BoC signalled that it planned to cut rates and was forced to backtrack and hike due to higher inflation, it would lose credibility. Also, the BoC does not want to encourage market speculation about rate cuts, since it would ease financial conditions, which could fuel higher inflation.
The markets remain convinced that the BoC’s current rate-tightening campaign is over and that we could see rate hikes in mid-2024. That means we can expect the BoC to maintain a “higher for longer” rate policy into next year, with the BoC holding rates in restrictive territory until economic conditions, notably lower inflation, warrant rate cuts.
Canadian Stock Markets and Canadian Dollar Rises but Cannot Consolidate
The Canadian benchmark stock market index, the S&P/TSX, rose marginally after the Bank of Canada rate announcement, rising as much as 112 points (0.55%) to 20,487.95. The index then lost reversed direction and closed on Wednesday down 101.72 points (0.50%) at 20,274.21.
The US Dollar against the Canadian Dollar traded on Wednesday at 1.3592 ahead of the BoC meeting and dropped to a low of 1.3548 following the meeting. The Canadian dollar could not hold onto these gains and closed Wednesday at 1.3593, almost unchanged on the day.
On Thursday, the Canadian Dollar is showing little movement and is trading at 1.3587 in the European session. S&P/TSX 60 Futures are down 7.30 points (0.59%) at 1223.80.