BOC Interest Rate Cut: Will They or Won't They?

To cut or not to cut? That is the question. The upcoming BOC statement could set the tone for the Loonie’s forex price action so let’s take a look at the factors that might influence the policymakers’ decision.

Interest rate cut from 0.50% to 0.25%

Unless you’ve been living under a rock, you’re probably aware that crude oil prices have taken quite a nasty beating towards the end of 2015 until the first couple of weeks this year. And with Canada relying heavily on its energy industry and oil exports, this commodity price tumble could once again take its toll on business revenues, production, and employment.

We’ve already witnessed this last year when continuous oil price declines forced some drilling companies to scale back or shut down operations, resulting to massive layoffs in energy-rich cities such as Alberta. To top it off, falling commodity prices also weighed on the country’s inflation trends, making the BOC less likely to tighten monetary policy anytime soon.

In fact, BOC Governor Stephen Poloz and his fellow policymakers already decided to act pre-emptively and announce interest rate cuts to cushion the blows on the Canadian economy. This kind of forward-thinking might lead BOC officials to lower interest rates by 0.25% once more this week, especially since most analysts expect oil prices to fall further with Iran’s return to the oil export market.

So far, other economic figures aren’t looking all that healthy, with the latest employment data indicating a reduction in full-time hiring and the Ivey PMI reflecting a contraction in the manufacturing industry.

No monetary policy changes for now

Others say that it’s still too early for the BOC to cut again and that their previous rate cuts, which Governor Poloz called “insurance”, are just taking effect. Besides, the Canadian dollar has depreciated significantly against its forex peers recently, putting a bit of upward pressure on inflation. That’s one less thing for the BOC to worry about, eh?

Besides, Canada’s trade numbers have actually been looking pretty good lately as exports rebounded for the first time in four months last November, buoyed by rising shipments of motor vehicles and parts. The recent decline in the Loonie’s value could keep international demand for Canada’s products supported since a depreciating local currency makes a country’s exports more affordable.

At this point, BOC officials might be wary of causing a sharper forex selloff for the Loonie since this would erode its value too quickly, spurring currency instability. For some analysts such as Avery Shenfeld, Chief Economist at CIBC World Markets, this unprecedented pace of decline might wind up hurting household confidence. Keep in mind that a falling local currency also makes imported goods more expensive, and the lack of upward pressure on wage growth due to weak hiring prospects means that Canadians might get less bang for their buck.

Now what?

Either way, the Loonie could be in for a lot of forex movement right around the time of the BOC decision, with traders pricing in their expectations and reacting to the actual policy statement. If you’re not comfortable keeping any Loonie positions open with this kind of event risk, better make the necessary adjustments or just sit on the sidelines during the announcement.

As always, I’ll keep you guys posted on how it all turns out and what the BOC’s monetary policy decision could mean for the Loonie’s longer-term forex trends. Stay tuned!