3 things to expect from the Bank of Canada’s today decision

The Bank of Canada’s interest rate decision highlights the upcoming North American session. The market expects another 75bp rate hike, as the Bank of Canada was one of the first central banks to start tightening the monetary policy after the COVID-19 pandemic’s stimulus.

If the central bank delivers such a rate hike, the policy interest rate becomes 3.25%. While much higher than in other parts of the world (e.g., the euro area, where the key interest rate is at 0), it is still well below the total CPI inflation in Canada.

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So here are three things to expect from today’s interest rate decision in Canada:

• Policy interest rate to reach 3.25%
• Hawkish rhetoric from the central bank
• The Bank of Canada is paving the way for the Fed’s decision 

Bank of Canada to raise rates by 75bp

A 75bp rate hike is already priced in, as reflected by the higher USD/CAD exchange rate. If it delivers on the expected rate hike, the central bank comes closer to its mission of preserving the value of money by keeping inflation low and stable.

Trust is paramount for a central bank.

The Bank of Canada closely follows the Fed’s policy in its efforts to fight higher inflation. As such, delivering a 75bp rate hike offers traders a solid clue that the Fed will do the same at its next meeting.  Here, I explain why the Fed will keep tightening its monetary policy.

Is it possible for the central bank to frontload rates?

Higher inflation poses serious concerns in the aftermath of the COVID-19 pandemic. As such, some central banks, including the Bank of Canada, have chosen to frontload rates.

In July, the central bank surprised markets with a 100bp rate hike, suggesting that interest rates will need to rise much more in the future.

But it is unlikely for the central bank to frontload rates at today’s meeting. One reason is that the second quarter GDP came in below expectations.

The Fed and the Bank of Canada move in tandem

A comparison between the Bank of Canada and the Fed’s monetary policy cycles over the years reveals an interesting phenomenon – the two central banks move in tandem.

Therefore, the Fed will likely lift the funds rate by another 75bp in September, should the Bank of Canada deliver such an increase today.

All in all, expect a hawkish Bank of Canada statement today. The key to interpreting the decision lies with what is already priced in.