The Bank of Canada is approaching a fifth interest rate cut... the expected scenario!

The Bank of Canada is approaching a fifth interest rate cut... the expected scenario!
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Financial markets are preparing for the upcoming decision from the Bank of Canada regarding interest rates, with forecasts suggesting a new cut that could be the fifth in a row. This anticipated step comes amid mixed economic data that have significantly impacted the economy, raising questions about the implications of this decision on the movement of the Canadian dollar and other currencies in the financial markets.

Here is a look at what is expected to be announced by the Bank of Canada:

First: A look at the economic data affecting the Bank of Canada's decisions:

Recently, several economic data points in Canada have emerged that will strongly influence the bank's upcoming decisions. The Canadian Statistics Office released labor market data, which was mixed, showing that the Canadian economy added about 50.5 thousand jobs in November, outperforming expectations which anticipated the addition of 24.7 thousand jobs. On the other hand, the unemployment rate in Canada was recorded at 6.8% in November, worse than the expectations that it would rise to only 6.6%.

Additionally, data from the Canadian Statistics Office revealed that the GDP of Canada grew by 0.1% month-over-month in September, less than the market expectations of 0.3% growth.

Furthermore, the Canadian Statistics Office reported on inflation data for October, which showed a positive performance that exceeded market expectations, with the Consumer Price Index rising by 0.4% month-over-month, surpassing forecasts that indicated a growth of only 0.3%. This improvement followed a decline of 0.4% in September. Year-on-year, the Consumer Price Index rose to 2.0% in October, exceeding expectations that predicted it would record 1.9%.

In light of the mixed performance of Canadian labor market data, alongside weak economic growth data, the Bank of Canada is unlikely to hesitate in reducing interest rates again, even with the return of Canadian inflation rising and exceeding market expectations. However, the pace of rate cuts during tomorrow's meeting will likely have a strong impact on the markets.

Second: Expectations from major banks regarding the Bank of Canada’s decisions:

Expectations from the majority of economists suggest that the Bank of Canada will cut interest rates by 50 basis points during its upcoming meeting, which will stabilize the interest rate at 3.25%. According to a Reuters survey, most participants believe that the bank may continue to gradually lower interest rates in the upcoming period, reaching lower levels by the end of 2025.

Moreover, Scotia Bank's analysis indicates that a potential interest rate cut is not merely a direct response to economic weakness, but rather a step to manage risks and meet market expectations.

Third: Statements from decision-makers within the Bank of Canada regarding monetary policy:

On the monetary policy front, the Deputy Governor of the bank, Rhea Mendes, confirmed that inflation is moving towards stabilization at the target level of 2%. She pointed out that a stable economic environment will enhance consumer and business confidence, allowing for increased spending and investment. She added that the bank will continue to monitor economic developments closely to make appropriate decisions in the future.

Fourth: Scenarios expected for the Bank of Canada’s decisions:

There are two main scenarios for the upcoming decision from the Bank of Canada: Scenario One: Involves cutting interest rates by 0.50% with an indication that further cuts may continue in the future, which could lead to negative pressure on the Canadian dollar in the markets.

Scenario Two, involves a rate cut along with statements that show the bank may temporarily pause further reductions due to the return of inflation rising, which could support the Canadian dollar positively.

Read also:

Bank of Canada: Advises buying the dollar amid ongoing geopolitical risks

Governor of the Bank of Canada makes very important statements during the bank's press conference

Deputy Governor of the Bank of Canada: Inflation is heading towards stability at the target of 2%


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