Canadian Dollar Rises as BoC May Cut Interest Rates in 2022

Summary

The Canadian dollar increased by 0.3% as the chances of a monetary policy easing from Bank of Canada dropped to 16.3%. The central bank still foresees its commencement as early as April. The inflation level is predicted to remain around 3.5% until mid-2024 before dropping to their 2% aim by 2025 end. Furthermore, the BoC could reduce interest rates in the coming year if the core inflation reduces as speculated, according to an interview aired on BNN Television. The key interest rate remains unchanged at a 22-year high of 5%.

Canadian Dollar Gains

The surge in data resulted in a 0.3% rise in the Canadian dollar to C$1.3351 against the greenback, equating to 74.90 U.S. cents, an improvement on C$1.3376 or 74.74 U.S. cents.

Monetary Policy Easing Chances Reduced

Monetary market expectations for monetary policy easing were lessened, with odds of a cut by Bank of Canada in the upcoming month decreasing to 16.3% from 21.4%. The market persists in expecting the central bank to commence easing by next April.

Inflation Predictions and Adjustments

Leading inflation remains largely on par with the Bank of Canada’s speculations of around 3.5% up to mid-2024, before gradually regressing to the central bank’s 2% aim by 2025 end. The two significant BoC measures of underlying inflation, CPI-median, and CPI-trim, remain consistent at 3.4% and 3.5% correspondingly.

Rate Cuts in Future?

Tiff Macklem, the BoC Governor, indicated in a recent interview on BNN Television that the Bank of Canada could begin reducing interest rates in the upcoming year if base inflation drops as forecasted.

Constant Interest Rate

The central bank’s key interest rate has remained unaltered at a 22-year high of 5% in its prior three policy meetings, asserting it is premature to deliberate about rate reductions. The subsequent rate pronouncement by the central bank is expected on Jan. 24.

Changes in Prices

Prices for food from stores witnessed a 4.7% increase in November, marking a decrease from October’s 5.4% climb. Energy prices showed a 5.7% reduction compared to the previous month’s 5.4% drop, as noted by Statscan. Excluding unpredictable food and energy, prices showed a 3.5% rise in contrast to a 3.4% annual surge in October.

The changes in monetary policy and inflation could potentially influence forex markets and trading, particularly impacting assets related to the Canadian dollar.

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