What will the Bank of Canada do about interest rates?

Bank of Canada (BoC) will make a decision on interest rates today. The market is firmly convinced that the bank has already completed the cycle of rate hikes after previously raising them by a total of 425 basis points. Therefore, analysts expect that the bank will not change interest rates in Canada at today's meeting, leaving the main one at 4,50 percent. Especially that at the last meeting the bank signaled such a decision.

What will the Bank of Canada do?

Interest rates in Canada are at their highest in 15 years. There are many arguments that their level (4,50%) should be sufficient to bring inflation to the target in the future. This process has already started. Inflation in Canada has been falling for 7 months. It has recently been falling more than market expectations.

In January, CPI inflation fell to 5,9 percent. YoY from 6,3 percent. in December and from 8,1 percent. in June 2022, when it reached its peak. The data surprised. The market expected it to drop to 6,1 percent. Y/Y. At the same time, core CPI inflation is also declining. In January, it fell to 5 percent in Canada. from 5,4 percent y/y in December and 6,2 percent. at its peak in June 2022.

The end of interest rate hikes by the Bank of Canada puts more pressure on the Canadian dollar against the US dollar. The difference in the level of interest rates between Canada and the US will work in favor of American currencies, because the Fed will end the cycle of hikes in May this year at the earliest. This is perfectly visible on the chart USD / CAD, where in early February there was a strong turnaround just above the November low (1,3226), which was accompanied by the RGR demand formation. Yesterday, USD/CAD broke above the local high of December (1,3705), which may herald increases towards USD 1,39-1,40.

USD/CAD daily chart. Source: Tickmill