CAD: Slight tendency towards unchanged interest rates – Commerzbank

Today's decision by the Bank of Canada (BoC) promises to be very exciting. Whether the Bank of Canada will cut interest rates again or wait until its next meeting at the end of July is not a foregone conclusion, Commerzbank's commodity analyst Carsten Fritsch notes.

CAD is likely to benefit from the rate decision

"Arguments in favour of another rate cut include the fact that the labour market is in a difficult position, the headline inflation rate has recently fallen back below 2% year-on-year and leading indicators show that Canada is experiencing a more negative effect from US trade policy than any other country. This comes at a time when Canada is already experiencing weak productivity growth."

"Conversely, there are also compelling reasons for a pause. Unlike the headline rate, the core rate recently rose back above 3% year-on-year, and the BoC may view this as a more accurate reflection of underlying inflationary pressure. Furthermore, the central bank has cut interest rates by 225 basis points in one year and the key interest rate is now close to the expansionary range. Policymakers may therefore wish to wait and observe the effects of the rate cuts before making further changes. With two new inflation figures and labour market reports due before the next decision, the BoC will have a clearer idea of whether further interest rate cuts are necessary."

"It is likely to be a close call, with the market still pricing in a residual probability of an interest rate cut today, and with the Bloomberg survey recently swinging towards unchanged rates. We also consider unchanged interest rates to be the more likely scenario, but we should not forget that the Bank of Canada is prone to surprises. If it stays put today, the CAD is likely to benefit, even if all eyes will then be on the July meeting."