BoC Preview - Upping the size of rate cuts
Oct 21 (Reuters) -The Bank of Canada is widely expected to step up the pace of easing by delivering a 50bp rate cut on Wednesday, taking the key rate to 3.75%.
With a larger 50bp cut near enough a done deal judging by market pricing, however, the bigger focus for the Canadian dollar will be on the latest economic projections and guidance from the BoC on whether 50bps increments is the new norm. If so, there is likely room for additional weakness in the currency.
Since the previous meeting, headline inflation has fallen to 1.6% from 2.5%, and the bank’s preferred core measures of inflation have also eased further, tracking just above 2% on a three-month annualised basis.
On the activity side, despite the firmer jobs report, the unemployment rate is still a touch higher than when the BoC last met. Meanwhile, the closely-watched business outlook survey reported that firms continued to experience weak demand.
For the Canadian dollar, risks remain lower heading into the meeting and with focus turning towards the U.S. election, this may keep USD/CAD underpinned. As has been previously highlighted, however, a plethora of hurdles between 1.3800-1.3950 have capped the pair over the last two years.
On the flipside, given the expectations for a larger cut, should the BoC opt for a 25bp cut, a knee-jerk move higher in the currency can be expected with a more pronounced move against the euro and kiwi.
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Justin McQueen is a Reuters market analyst. The views expressed are his own, editing by Ed Osmond
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