Today, at 3PM GMT, the Bank of Canada will release its first interest rate decision of the year. To traders, investors, and Canadians, this decision will be vital.
As you recall, before the financial crisis of 2008/09, the base interest rate in Canada was 4%. Within and after the crisis, the BoC started providing support by lowering rates. Ultimately, the committee brought the interest rates to 0.25% in April 2009. In June the following year, it raised the rates to 0.75% and in the next meeting, they raised to 1%.
In the January 2015 meeting, the committee lowered rates to 0.75% amid rising inflation. In the July meeting, they lowered further to 0.5%. Last year, they raised rates to 0.75% in July and 1% in the next meeting.
As such, the BoC has been quite active compared to the Fed and other major central bankers.
Today, traders expect the committee to raise rates by 25 bases points to 1.25%. However, there is a problem.
Recently, there have been reports that Donald Trump would tear down NAFTA. This is a large trade deal between the United States, Canada, and Mexico. The deal has been so important to the three countries such that an exit would lead to significant consequences. For example, the United States and Canada are key trading partners. The Bank of Canada’s Monetary Policy Committee will most definitely think about this in their meeting.
As shown below, the Canadian Dollar had been strengthening against the dollar until reports from Canadian officials raised their bets that Trump would exit the agreement.
The rate decision today comes at an interesting period. The economy is currently doing well, boosted by high commodity prices. As you know, Canada is a major crude oil exporter and crude oil is currently at a 3-month high. Couple this with a weaker dollar.
In addition to this, the decision comes at a time when Canada has the highest household debt. Also, while the unemployment rate has declined in the past few months, the wage growth problem continues to persist. A recent report by Statistics Canada showed that while wages are growing, when you adjust them to inflation, most Canadians were still struggling.
As such, the rate of delinquencies is increasing and most Canadians fear that personal bankruptcies might be looming. A recent research found that 40% of Canadians are within $200 of not being able to meet their debt obligations.
Further, most Canadian banks have moved to increase their mortgage rates. The so-called Big Six banks: Bank of Montreal, National Bank of Canada, Canadian Imperial Bank of Commerce, Royal Bank of Canada, Toronto-Dominion Bank, and Bank of Nova Scotia, have all raised their mortgage rates to about 5.44%.
Today, traders will pay a close attention to both the headline number and the readout from the meeting. As a result of the challenges I have mentioned, there is a likelihood that the committee will leave rates unchanged and thus surprising a market that anticipates a rate hike. The readout will give traders an indication of what to happen in the next meetings this year.
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