Preview of the January Bank of Canada (BOC) meeting
2025-01-30
■ The benchmark rate is expected to fall to 3.00% at the January policy meeting, which is within the estimated neutral rate range (2.25-3.25%).
■ The focus is on the ultimate target level of the rate cut (terminal rate), with negative factors such as economic weakness, political instability and relations with the United States intertwined.
The Bank of Canada (BOC) plans to announce the resolution of its first policy meeting of the year on January 29. Last year, the Bank of Canada was the most aggressive among the G7 central banks in cutting interest rates (accumulatively cutting interest rates by 1.75%), and the focus of this meeting will turn to clues to the terminal rate.
The market generally expects the Bank of Canada to cut interest rates for the sixth consecutive time, but the reduction will be reduced to 0.25%, and the benchmark rate is expected to fall to 3.00%. The Consumer Price Index (CPI) for December last year, released on January 21, showed that the overall inflation rate rose by 1.8% year-on-year, below the Bank of Canada's target of 2%; the core inflation indicator CPI Trim rose by 2.5% year-on-year, which also slowed down. However, the employment data for December last year released on January 10 showed a solid performance, with the unemployment rate falling to 6.7% and the number of employed people increasing by 91,000 from the previous month. In addition, the current policy rate has reached the upper limit of the Bank of Canada's neutral interest rate estimation range (2.25-3.25%), and monetary policy is gradually moving away from a tight state. Therefore, the pace of interest rate cuts may slow down.
As of this writing, short-term financial markets expect the BOC's terminal interest rate to be in the range of 2.50-2.75%. At the January meeting, the BOC will also release its quarterly Monetary Policy Report (MPR), which may provide more clues about the terminal interest rate. If the market's expectations for the terminal interest rate fall further to near the median of the neutral interest rate range, it may have a significant impact on the Canadian dollar and Canadian financial markets, so it needs to be closely monitored. The actual GDP data for the fourth quarter of last year will be released on February 28, and the GDP data for the third quarter of last year was lower than the BOC's forecast in October last year, so it is expected that the BOC may further lower its economic growth expectations in the MPR.
In addition, the external environment facing the Canadian economy remains challenging, mainly involving the following two aspects: (1) political factors, and (2) relations with the United States. (1) Prime Minister Trudeau announced his resignation as prime minister and leader of the ruling Liberal Party on January 6. According to a poll conducted by a polling agency in December 2023, the support rate of the main opposition Conservative Party was 45%, while the Liberal Party was only 20%. The federal election will be held on October 20 at the latest, and the possibility of regime change is high. (2) The Trump administration may impose a 25% tariff on Canadian imports as early as February 1. In 2023, 77.1% of Canada's total exports went to the United States. If the tariffs are implemented, the Canadian economy will be severely impacted. Therefore, how the BOC evaluates these unfavorable factors in the MPR will also affect the market's expectations for the terminal interest rate.
■ The focus is on the ultimate target level of the rate cut (terminal rate), with negative factors such as economic weakness, political instability and relations with the United States intertwined.
The Bank of Canada (BOC) plans to announce the resolution of its first policy meeting of the year on January 29. Last year, the Bank of Canada was the most aggressive among the G7 central banks in cutting interest rates (accumulatively cutting interest rates by 1.75%), and the focus of this meeting will turn to clues to the terminal rate.
The market generally expects the Bank of Canada to cut interest rates for the sixth consecutive time, but the reduction will be reduced to 0.25%, and the benchmark rate is expected to fall to 3.00%. The Consumer Price Index (CPI) for December last year, released on January 21, showed that the overall inflation rate rose by 1.8% year-on-year, below the Bank of Canada's target of 2%; the core inflation indicator CPI Trim rose by 2.5% year-on-year, which also slowed down. However, the employment data for December last year released on January 10 showed a solid performance, with the unemployment rate falling to 6.7% and the number of employed people increasing by 91,000 from the previous month. In addition, the current policy rate has reached the upper limit of the Bank of Canada's neutral interest rate estimation range (2.25-3.25%), and monetary policy is gradually moving away from a tight state. Therefore, the pace of interest rate cuts may slow down.
As of this writing, short-term financial markets expect the BOC's terminal interest rate to be in the range of 2.50-2.75%. At the January meeting, the BOC will also release its quarterly Monetary Policy Report (MPR), which may provide more clues about the terminal interest rate. If the market's expectations for the terminal interest rate fall further to near the median of the neutral interest rate range, it may have a significant impact on the Canadian dollar and Canadian financial markets, so it needs to be closely monitored. The actual GDP data for the fourth quarter of last year will be released on February 28, and the GDP data for the third quarter of last year was lower than the BOC's forecast in October last year, so it is expected that the BOC may further lower its economic growth expectations in the MPR.
In addition, the external environment facing the Canadian economy remains challenging, mainly involving the following two aspects: (1) political factors, and (2) relations with the United States. (1) Prime Minister Trudeau announced his resignation as prime minister and leader of the ruling Liberal Party on January 6. According to a poll conducted by a polling agency in December 2023, the support rate of the main opposition Conservative Party was 45%, while the Liberal Party was only 20%. The federal election will be held on October 20 at the latest, and the possibility of regime change is high. (2) The Trump administration may impose a 25% tariff on Canadian imports as early as February 1. In 2023, 77.1% of Canada's total exports went to the United States. If the tariffs are implemented, the Canadian economy will be severely impacted. Therefore, how the BOC evaluates these unfavorable factors in the MPR will also affect the market's expectations for the terminal interest rate.