Canadian Dollar: Bank of Canada Reckons It Has Done Enough

Above: File image of BoC Governor Macklem. Image © Bank of Canada, Reproduced Under CC Licensing

Those looking for a stronger Canadian Dollar were left disappointed by a Bank of Canada that maintained interest rates at 5.0% and signalled it was in no hurry to hike again.

The Canadian Dollar was softer against most of its G10 peers after the Bank said it would place confidence in forecasts that suggested inflation would continue to move lower over the coming months.

The decision to maintain existing interest rate settings by Governor Macklem and his team follows Friday's release of disappointing GDP figures, which they believe is evidence the impact of previous rate hikes is having an effect on the economy.

"The softness of recent growth and labour market data made it an easy call for the Bank of Canada to leave rates unchanged," says Avery Shenfield, an economist at CIBC Bank.

The statement conceded that "inflationary pressures remain broad-based" and wage growth is still running in the 4-5% range, lifting both costs and spending power.

"But an easing in demand and increased labour market slack are cited as evidence that the lagged impacts of monetary policy are kicking in, and the Bank now needs to see if, given time, that brings both wage and price pressures to heel," notes Shenfield.

Following the data the U.S. Dollar to Canadian Dollar conversion rose a further 0.12% to quote at 1.3657. The Pound to Canadian Dollar exchange rate was however lower at 1.7062, a move that was largely a result of the broad-based weakness currently experienced by Pound Sterling following comments from Bank of England Governor Andrew Bailey.

The Bank of Canada nevertheless offered some downside protection to the Canadian Dollar after it warned it remain prepared to hike again if needed.

This is standard communication from a central bank that is keen to ensure money markets don't bring forward expectations for interest rate cuts, a development that risks unwinding the hard work of previous rate hikes.

Nevertheless, CIBC reckons increased unemployment rates in upcoming months will mean that 5% will in fact be the peak rate for this cycle.

"That said, we're still a long way from a full all-clear statement from the BoC, let alone any mention of rate cuts," says Shenfield.