BoC: Steady policy to be maintained - Rabobank

The market consensus is favouring a 25 bp rate hike from the BoC at its policy meeting later today and Jane Foley, Senior FX Strategist at Rabobank points out that they are cognisant that market pricing may be offering the Bank a difficult to resist opportunity to normalise policy without creating a tantrum in asset prices. 

Key Quotes

“On balance we expect steady policy to be maintained based on the simple fact that inflation remains benign.   Which way BoC policy makers vote this afternoon will have obvious implications for the CAD.  However, the market is also likely to infer that other central banks may be inclined to follow the example set by the BoC.  While there is no evidence to suggest that there is any collusion between central banks at present, game theory presents some reason for central banks to at least consider the actions of their peers in particular to reduce the risk of large swings in FX.”

“CPI inflation remains well below the central bank’s target with the core measure recording a rate of 1.3% y/y in May.  Despite the substantial improvement in the labour market this year in terms of both quantity and quality of jobs, wage growth remains absent, recording a rise of just 1.29% y/y in May after a record low of 0.66% y/y in April.  Last week expectations that the Riksbank would remove its easing bias were disappointed when all the central bank offered was the conclusion that a rate cut was less likely than before – but could still happen.  A similar disappointed market reaction could follow the BoC meeting today.”

“With a hike today nearly fully priced in and the market partly expecting a second hike this year, we think the Bank of Canada’s potential tightening bias is already in the price. As such, a 25bp rate hike is unlikely to drive USD/CAD much lower. If the Bank does raise rates we would expect it to be a “dovish hike”, thus tempering expectations of further hikes going forward. Indeed, we think that regardless of the outcome of today’s meeting, USD/CAD is likely to pop higher.  A break of the USD/CAD1.2950 level would open up scope for a move back to 1.30.”