CAD: Are we seeing interest rate cuts of 50 basis points? – Commerzbank
|Recently, Bank of Canada (BoC) Governor Tiff Macklem hinted that a larger rate cut of 50 basis points may be appropriate in the coming months. The market has already priced this in quite well, with expectations having corrected significantly in recent weeks, Commerzbank’s FX Analyst Michael Pfister notes.
BoC to accelerate the pace of rate cuts in the coming months
“The market now expects a cut of around 25 basis points at each of the next seven meetings. A move of 50 basis points at each of the next two meetings is even priced in with a probability of around 50%. If that happens, the BoC would have halved the key rate in just under 15 months by the middle of next year.”
“At first glance, this acceleration may seem surprising. After all, the BoC has already cut rates three times by 25 basis points over the last couple of months, putting it in the middle of the G10 pack on policy rates, while other central banks are still hesitating. But there are good reasons for this. Canadian headline inflation has recently fallen back to the middle of the BoC's target range, at 2% year-on-year.”
“In the short term, a more restrictive monetary policy than necessary can have a stabilising effect on the CAD. In the medium term, however, the picture is likely to be different. We are already seeing clear signs of a slowdown in the labour market. And growth is no longer as strong as it once was. There is therefore a strong case for the BoC to accelerate the pace of rate cuts in the coming months – and the CAD is likely to suffer again.”
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