Bank of Canada's Mandate How Rate Cuts Fit In
Bank of Canada's Mandate How Rate Cuts Fit In

Bank of Canada’s Mandate: How Rate Cuts Fit In

The Canadian dollar is projected to appreciate less than initially anticipated over the next year as the plan for rate cuts expectations from the Bank of Canada advances in controlling inflation and is expected to start reducing interest rates before the Federal Reserve. 

Based on the median forecast from nearly 40 foreign exchange analysts, the Canadian dollar is expected to appreciate by 0.7%, reaching 1.36 per U.S. dollar, or 73.53 U.S. cents, within three months, compared to 1.34 in last month’s poll.

Governor Tiff Macklem stated this week that the Bank of Canada is nearing the point of reducing market rate cut expectations for its benchmark interest rate from 5%, the highest in over two decades. He added, 

“The data since January have increased our confidence that inflation will continue to decline even as economic activity strengthens gradually.”

There is a limit to how much interest rates in Canada and the U.S. can differ

The Bank of Canada’s key interest rate is currently at five percent, which is lower than the Federal Reserve’s target range of 5.25 to 5.5 percent.

BMO chief economist Douglas Porter explained that expected rate cuts could not diverge significantly because it would cause a substantial depreciation of the Canadian dollar against the U.S. dollar. This would increase the cost of imports from the U.S. and could disrupt trade due to large currency fluctuations, he added. The Bank of Canada has been encouraged by recent progress in controlling inflation.

Core inflation measures, which exclude volatile prices, have eased over the past few months. Canada’s annual inflation rate was 2.9 percent in March, lower than the U.S. rate of 3.5 percent.

Governor Tiff Macklem has indicated that the Bank of Canada is observing favourable trends to consider lowering interest rates, but it seeks to ensure these rate cut expectations trends are sustained over a longer period. Forecasters broadly anticipate that the Bank of Canada will start reducing its policy rate in June or July.

Stay tuned with us to be informed about the market rate cut decisions, how the foreign exchange market works and what are the current trends of investment.

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