Markets focus on BOC interest rate decision

The Bank of Canada is likely to maintain interest rates at 5.00%

By Raed Alkhedr | @raedalkhedr | 6 September 2023

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  • BOC decision expected to keep interest rates at 5.00% after a recent 25 basis point hike.

  • Market analysts foresee no monetary policy changes in Canada until the end of 2023, with potential rate cuts in 2024.

  • Canadian economy contracted in Q2, and BOC is likely to maintain policy for assessment.

BOC decision in the spotlight

BOC decision is under the radar today with most expectations supporting the likelihood of the bank keeping the interest rate unchanged at 5.00% following its recent decision to raise the rate by 25 basis points in its previous meeting.

Market analysts predict that the bank will maintain its current monetary policy without any changes until the end of 2023. From 2024 onwards, the bank might consider lowering the interest rate due to the economic pressures facing Canada presently.

During the second quarter of the year, the Canadian economy experienced a period of contraction after a 0.6% growth in GDP during the first quarter. It is anticipated that the Bank of Canada will refrain from altering its policy to allow for more time to assess the ongoing developments.

The recent increase in energy prices since August may prompt the bank to adopt a cautious stance in terms of inflation expectations, as reflected in its policy statement. However, indications of a slowdown in the labor market and consumer activity may lead the Bank of Canada to avoid leaving the door open for further policy tightening.

USD rises ahead of ISM services PMI

The US dollar has remained relatively stable hovering near its highest levels in the past six months. This stability has been influenced by concerns surrounding Chinese economic growth and an increase in risk aversion among investors. On the other hand, the Japanese yen has strengthened following recent statements by senior diplomats warning against intervention should the value of the yen continue to decline.

The yen has appreciated by approximately 0.4% against the US dollar, reaching levels around 147. The Japanese government previously intervened in the currency markets about a year ago when the yen depreciated to around 145 against the US dollar.

The dollar index, which measures the value of the US dollar against six major currencies, has risen to around 104.69, with its highest level reaching 104.90.

One of the primary factors driving the surge in demand for the US dollar is the growing risk aversion prevailing in the markets due to disappointing Chinese economic data. These data have raised concerns about a potential global economic downturn. Additionally, key sectors in Europe have also experienced contraction, placing further pressure on global market performance and bolstering the strength of the US dollar.