Canadian Dollar: Bank of Canada Surprises with 50bp Rate Hike


"We are getting closer to the end of this tightening phase but we are not there yet," - Bank of Canada Governor Tiff Macklem


The Bank of Canada, Ottawa. Image reproduced under CC licensing conditions 

The Canadian Dollar was left trailing behind other major currencies following October's Bank of Canada (BoC) decision to slow the pace at which it raises interest rates, which surprised the market and has led many forecasters to reconsider the outlook for the Loonie.

The BoC raised its cash rate by only half a percentage point on Wednesday, disappointing analysts, economists and markets that had looked for another three quarters of a percent increase to take the benchmark up to 4%.

Wednesday's decision came accompanied by downgraded forecasts for economic growth and other projections that continued to suggest it could take until the end of 2024 for the local inflation rate to return to the 2% target.  

"As you mentioned, in our latest outlook we have growth stalling for the next several quarters or to be more precise, growth is close to zero in the fourth quarter of this year and the first two quarters or the first half of next year," BoC Governor Tiff Macklem said at one point in Wednesday's press conference. 

Source: Bank of Canada.

"What that means is that yes a couple, two, three quarters of slightly negative growth is just as likely as two or three quarters of slightly positive growth. That's not a severe contraction but it is a significant slowing," he added.

The BoC has announced six increases in its cash rate since March 2022 including a one percent incrrease in April that was the largest in Canada since 1998 and a 0.75% increase back in September, which have lifted the benchmark for borrowing costs from 0.25% to 3.75% over the course of this year.

While the bank did say in Wednesday's statement that further increases in the cash rate are still likely in the months ahead, Governor Tiff Macklem also acknowledged pointedly in the press conference that the end of the BoC's current tightening cycle is drawing near. 

This is potentially a milestone development for the Canadian Dollar, which has benefited significantly this year from interest rate rises that have more than kept pace with those of the Federal Reserve as the latter itself lifted U.S. borrowing costs from 0.75% to 3.25%.

With that, below is a selection of the latest analyst and economist views on what this could mean for interest rates and the Canadian Dollar going forward. 

Shaun Osborne, chief FX strategist, Scotiabank

"The policy decision feels somewhat at odds with recent comments from the Gov. which suggested little appetite to “fine tune” tightening and concern about the CAD." 

"The CAD has drifted back to the 1.36 area in quiet overnight trade and may be at risk of further slippage if the risk mood sours but we think scope for CAD losses are limited in the near-term and anticipate USD supply emerging in the mid/upper 1.36s."

"Choppy trade yesterday has clouded the short-term outlook for the CAD from a technical point of view. USD losses found support near 1.35, the early Oct low, while the snap rebound in the USD failed to hold gains to the mid-1.36s."

"The USD is grinding higher this morning and looks set to retest 1.3650/55 intraday."

Mazen Issa, senior FX strategist, TD Securities

"We have held a bearish view of CAD since June and we remain resolute in that view especially now that the BOC has signaled the worst is yet to come. For us, the rationale has been that the higher that rates go, the greater the downside it creates for the macro environment."

"There was concern expressed in both the statement and accompanying MPR that the interest-rate sensitive sectors of the economy are slowing. Indeed, those pockets of the economy have been crucial in supporting previous expansions. Not anymore."

"We think the outlook for the CAD has decisively shifted lower in the weeks and months ahead. We implemented a long USDCAD position ahead of the decision (aiming for 1.40); the fourth time this year. This position has struggled due to the recent global central bank downshift which helped to support a risk rally and soften the USD."

"We will continue to hold this position given an earlier pivot by the BOC though we are sympathetic to the idea that the USD could continue to soften on some of the tactical cross currents, especially if EURUSD can hold the breach above the downtrend established from the February highs."

Warren Lovely, chief rates strategist, National Bank of Canada Financial Markets

"While there was some debate amongst economists over the size of today’s hike (i.e., 50 vs. 75 bps), traders had all-but-fully embraced/discounted the larger 75 bp move."

"While the 50 bp move may not jive with recently hawkish rhetoric, today’s rate statement (and associated commentary) make clear that the Governing Council is now willing to weigh the risks of over- vs. under-tightening."

"It's clear that much continues to depend on the evolution of inflation. While this may not be the last hike, it's hopefully the final 'large' tightening the economy is subjected to."

"We believe it's time for the Bank to adopt a more data dependent stance; the time for policy rate fine tuning is now upon us. No more big steps then and perhaps only one final small step up to end a truly extraordinary year of tightening."

Bipan Rai, North American head of FX strategy, CIBC Capital Markets

"The front-loading phase is near the end. Not only that, but the nature of data dependency now shifts the conversation to “25 or 50” for the December meeting, and we’re probably not far off from the ‘finely balanced’ decision by decision approach (or zero or 25bps)."

"We’re still fairly comfortable with the idea that terminal is around 4.25%. That means that if we see the Bank by 50bps in December, that likely takes us into the ‘finely balanced’ zone. Alternatively, a 25bps hike for December would likely be followed by another 25bps hike at the January meeting."

"It did feel like Macklem placed greater weight on the effects of prior rate hikes working their way through to slow activity and that more rapid measures of core inflation are trending the right way."

"The view here remains to buy retracements to the 1.34 area [USD/CAD] and I’m still comfortable with that view. Our spot desk likes fading CAD on the crosses and that feels like the better play in this environment. EUR/CAD should be closer to 1.38 in the near-term."

"For today, there are some domestic data points, but price action will be driven by external events (ECB namely)."

 Josh Nye, senior economist, RBC Capital Markets

"While the BoC isn’t using the r-word, it acknowledged “a couple of quarters with growth slightly below zero is just as likely as a couple of quarters with small positive growth.” That might be as close as the central bank will come to calling a recession until we’re actually in one."

"While the BoC cut its 2023 growth forecast in half to 0.9%, that’s still well above our 0.2% projection."

"Today’s dovish pivot supports our view that the BoC will continue to taper its tightening cycle into year end with a 25 bp increase in December leaving the terminal rate at 4%. Risks around that forecast are still skewed to the upside."

"Indeed, Macklem seemed to frame next meeting’s debate as 25 vs. 50 bps—and we think the BoC will want to see further easing in monthly core inflation measures and inflation expectations to pause at 4%."