BOC Preview: Getting ready for a dovish pivot?

The Bank of Canada (BOC) is on track to deliver another 75 basis points (bps) hike when it concludes its October monetary policy meeting at 14:00 GMT this Wednesday. Amidst red-hot inflation and mounting recession risks, the central bank is widely expected to raise its policy rate from 3.25% to 4.00%.

In September, the central bank announced a 75 bps rate hike and took the key rates to the highest since 2008 at 3.25%. The move pushed monetary policy into restrictive territory. The BOC also hinted at more aggressive tightening despite cooling inflation and a dwindling economic recovery.

Will the central bank shrug off recession fears this time as well? Is the central bank getting ready for the shift to a dovish pivot? Markets will try to seek answers from the bank’s Monetary Policy Report (MPR), which will be published parallelly at the time of the interest rate decision. Governor Tiff Macklem’s press conference at 15:00 GMT will be also closely scrutinized for the bank’s next policy move.

Calls for another super-sized rate hike at the October meeting amplified last week after Canada's annual inflation rate eased but exceeded forecasts in September. Canadian Consumer Price Index (CPI) stood at 6.9%, beating estimates of 6.8% but down from 7.0% in August. Excluding food and energy, core CPI rose 5.4% from 5.3% in August.

All eyes will be on the bank’s economic projections, with downward revisions to growth and inflation forecasts for this year and the next. Various economists and industry experts have already flagged growing risks of the Canadian economy tipping into recession next year amid the housing downturn.

Macklem, however, reiterated that the primary goal of the bank is to restore price stability. He said in a video tagged #AskTheBoC earlier this month, "it is by raising interest rates that we're going to slow spending in the economy, give the economy time to catch up and take the steam out of inflation.”

Therefore, it seems unlikely that the bank will decide to shift gears and slow down the pace of tightening, as it remains committed to raising rates until inflation is brought under control. In case it does, the crucial details could be outlined in the MPR accompanying the rate decision. 

USD/CAD probable scenarios

In case the BOC meets expectations and announces a 75 bps rate hike, the Canadian dollar could see a “sell the fact” trading, bumping up USD/CAD back towards 1.3850. The uptick in the pair could gather pace if the MPR rings in caution over recessionary risks and hints at a potential cooling in the bank’s tightening pace at the upcoming meetings. Markets are expecting the policy rate to peak between 4.25% and 4.50% early next year.

Should the central bank say that it will stay data-dependent while delivering a 75 bps rate increase, it will be also viewed as a dovish hike. The BOC could sound cautious ahead of Friday’s monthly GDP release. Meanwhile, a clear shift to a dovish pivot is likely to smash the loonie against the US dollar.

If the bank surprises markets with an unexpected 50 bps rate hike, it will reinforce the bullish outlook on the USD/CAD pair, as the Fed remains on course to go for a 75 bps rate hike next month. Although there are slim chances for the BOC to under-deliver, given its price stability mandate.

A hawkish rate hike, with Macklem and Company maintaining their pledge to increase rates, in order to bring down inflation, could help CAD bulls extend their recent winning momentum. The major could target levels at around 1.3600, multi-week troughs.