- The Bank of Canada is anticipated to reduce its policy rate by 50 basis points.
- The Canadian Dollar has dropped to fresh four-year lows against the US Dollar.
- Headline inflation in Canada saw a modest uptick in October.
The Bank of Canada (BoC) is expected to announce a 50 basis points (bps) interest rate cut on Wednesday, reducing its benchmark rate to 3.25%, following a total of 175 bps in cuts since June. Ahead of the announcement, the Canadian Dollar (CAD) remains near four-year lows against the US Dollar (USD), bolstered by the Federal Reserve's monetary tightening and the anticipation of a Republican win in the 2025 US Presidential election.
Canada's economic growth remains sluggish, with the real Gross Domestic Product (GDP) rising by just 0.3% in the third quarter, down from 0.5% in the previous two quarters. Growth is underperforming relative to BoC’s forecast, indicating that rate cuts have yet to significantly stimulate the economy.
Inflation in Canada remains within target. The Consumer Price Index (CPI) rose 2.0% in October, slightly above September’s 1.6% increase and the 1.9% market expectation. Core CPI, which excludes volatile food and energy prices, rose to 1.7%, from 1.6% in September. Despite the uptick, the BoC has indicated that inflation risks are balanced and expects GDP to grow by 1.2% in 2024 and 2.1% in 2025.
The BoC’s upcoming rate decision may have a modest negative impact on the CAD, with market focus shifting to Governor Tiff Macklem’s press conference at 15:30 GMT for further guidance. A surprise decision, such as a smaller 25 bps cut, could be interpreted as hawkish, potentially strengthening the CAD.
Valeria Bednarik, Chief Analyst at FXStreet, notes that the USD/CAD pair is nearing the 1.4200 level but remains at risk of a pullback. A dovish message from the BoC could drive USD/CAD above this resistance and towards the 1.4297 level, the April 2020 high.
