By Orbex

The Bank of Canada will be holding its monetary policy meeting this week on Wednesday. The bank has left interest rates unchanged at 1.75% for the past five monetary policy meetings.

While the central bank’s forward guidance has turned dovish previously, we expect that this could change. However, it could still remain cautious. The central bank was proved right when it deemed the soft economic patch in Canada temporary.

Various measures of economic data show that there is a strong chance for the economy to bounce back. This included the better than expected inflation data. GDP has also been ticking higher since April after declining in the months before.

Canada Inflation Hits BoC’s Target Rate

Inflation data from Canada for May saw consumer prices rising to the BoC’s inflation target rate of 2.0%. The core inflation measures were one of the highest since 2012.

• Headline inflation in May rose 2.4% on the year, coming out stronger than expected
• The BoC core measures of inflation have been at 2.1% on average
• The uptick in inflation came on higher prices in food and transportation, pushing the yearly inflation rate higher

The May inflation report was no doubt stronger than expected. Following the report, the expectations for the BoC to cut rates fell. The markets are expecting less than a 50% chance of a rate cut from the BoC this year.

The uptick in inflation is likely to see the pressure easing on the Bank of Canada. However, the central bank is unlikely to react to the inflation report with a rate hike. At best, the higher prices in food and transportation will keep the BoC in a wait-and-see mode.

Despite the positive inflation data, major headwinds still remain for the BoC which will result in the central bank treading cautiously. But the likelihood of a rate cut remains low at the moment.

Canada’s Unemployment Rate Ticks Higher

The latest jobs report, however, was a tad disappointing with the data seen to be unlikely to shift the BoC’s view on interest rates. Data from Statistics Canada showed last Friday that the jobless rate ticked higher.

Canada’s unemployment rate rose to 5.5% while the economy was seen shedding 2,200 jobs during the month in June. But, despite the weaker than expected jobs report, economists shrug aside data following two months of solid gains on the jobs sector.

But given the weakness in the jobs report, the optimism drawn from the inflation and rising GDP numbers could be offset.

Will the BoC Signal Rate Hikes Again?

Policymakers at the Bank of Canada are likely to see diverging paths, especially comparing to the Fed and the ECB. Both the central banks have been preparing the markets for a possible rate cut.

While the Fed remains on the sidelines, for now, the recent declines across various sectors add to the downside view. The markets remain hopeful for at least two rate cuts from the Fed.

The ECB, on the other hand, has sent across the message that interest rates could be lowered further. It also opened up the possibility of restarting its QE program. In contrast, the BoC remains one of the few central banks that could either see rates remain on hold or perhaps even a rate hike.

Given the global headwinds and the trade uncertainty, it is unlikely that the BoC will hastily raise rates. As a result, we expect the Bank of Canada to strike a cautious tone in the markets this week.

There is scope for the BoC to do away with the dovish forward guidance, it could be replaced with a hint of hawkishness while remaining cautious of the incoming economic data.

By Orbex