The Bank of Canada Preview: October is better placed for the rate hike as Nafta deal uncertainty weighs

• The Bank of Canada is expected to keep the target policy rate unchanged in September at 1.50%.
• After July rate hike Nafta deal uncertainty overshadows headline inflation touching the upper boundary of the targeted band.
• Nafta talks concluded on 31 August with no agreement and Trump’s tweets damp the optimism behind a trilateral deal, clouding the economic future for Canada.
• Loonie is set to fall even with October rate hike priced-in as US rate hiking cycle and growth differential plays in favor of the greenback.

The Bank of Canada is expected to stand pad on the target policy interest rate at the beginning of September after the Bank of Canada hiked the policy rate by 25 basis points back in July bringing the rate to 1.50%. The Bank of Canada is likely to remain focused on the incoming data emphasizing the stance of gradual monetary policy normalization.

Moreover, the Bank of Canada September meeting takes place at the same time as another round of Nafta talks that are still dragging on and on with no outcome for Canada. 

The September meeting is therefore expected to dent the expectations for October move with the Bank of Canada using the same conditional language of data dependency.

Loonie is expected to fall towards 1.3300 against the greenback as a result after easing off from the cyclical highs of below 1.2900 reached at the end of August.

In terms of the economic development, the inflation is the most important element with headline inflation rising by 3% over the year in July, touching the upper boundary of the targeted band. That would imply monetary tightening, but stripping the headline inflation of volatile items including food and energy brings a much clearer picture for the central bank and the Bank of Canada’s core inflation gauge rose 2.1% over the year. And that means that the underlying inflation pressures are much less severe.

In terms of the economic growth, the GDP evolves in line with the Bank leaping off economic growth near 2% level between the third quarter of 2017 and the first quarter this year. Marginally better than expected GDP growth is enough to justify for the rate cut, but it is unlikely to come in September. 

Markets are betting on October rate hike in Canada, as the Bank of Canada releases its quarterly Monetary Policy Report and with the press conference after the October meeting, the time is right in October and forget the September hopes.