Bank of Canada Interest Rate Decision – Any reasons for further action?

Fundemental

In Canada, the pandemic has led to historic losses in output and jobs. GDP in the first quarter of 2020 was 2.1 percent lower than in the fourth quarter of 2019. Second-quarter GDP is forecasted for additional declines, as continued widespread shutdowns combined with falling oil prices are taking their toll on output. As a result, the Bank orchestrated fiscal policies and lowered interest rates to buffer the impact of the shutdown on disposable income and helping to lay the foundation for economic recovery. The intended outcome to improve market conditions has taken effect as the Bank reduced the frequency of its term repo operations to once per week, and its program to purchase bankers’ acceptances to bi-weekly operations. Meanwhile, its other programs to purchase federal, provincial, and corporate debt have remained intact until the economic recovery is well underway.

However, due to the inflation being near zero, any further policy actions would be calibrated to provide the necessary degree of monetary policy accommodation required to achieve the inflation target of 1.6 and 2 percent.

Since the 3^rd of June meeting, the newsflow on the economy has been broadly positive, with rising employment in May by 290,000 and 1 million in June, as business sentiment indicators have moved higher and housing starts have jumped. Thus, the market widely expects the policy settings to remain unchanged in today’s meeting and the bank to adopt a (wait and see) tone.

Technical

• USD/CAD still holding above the 1.3500 support level
• Unexpected monetary policy adjustments could add volatility to the pair

Major Economic Events

Disclaimer

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