Bank of Canada to bring rates into restrictive territory next week

Next week, the Bank of Canada will have its monetary policy meeting. Market consensus is for an increase in the key rate to 3.25%. Analysts at TD Securities look for the BoC to deliver a 75 basis point hike, bringing rates into restrictive territory. They see little incentive for smaller hikes CPI running well above target and the economy in excess demand. The BoC's messaging will be the larger source of uncertainty; we expect the Bank to emphasize that rates are now restrictive and signal that future hikes will be more modest in size.

Key Quotes:

“The economic situation clearly calls for restrictive policy rates, and we see a clear path for the BoC to hike by 75bps in September. We expect the pace of tightening to slow in October however, which may imply some moderation in the Bank's forward-looking language in the September communique.”

“Ahead of the BoC, we note that USDCAD has started to run ahead of the global drivers we track for the pair. Our tools peg USDCAD around 1.30. In turn, while we could see some action above 1.32 in the short-term, we prefer to fade those rallies given the divergence in risk sentiment and other drivers.”

“The market is pricing a terminal rate for this hiking cycle around 3.875%, we see fair value closer to 3.65% taking our call of 3.5% for the terminal plus allowing for the probability of realizing higher than 3.5% (where we see the risks to our forecast), a 4% terminal price would give us substantial conviction to fade.”

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