Bank of Canada Expected to Hold Rates

The Bank of Canada (BoC) will be the sole representative of major central banks to make an official announcement next week.

BoC Governor Stephen Poloz, dubbed “Sunny Stephen” by The Economist, remains optimistic about the Canadian economy having an export-led recovery that will be boosted by a weaker loonie, as the Canadian $1 coin is known. Poloz addressed a business audience at Charlottetown, PEI on May 19. At that meeting, he stuck to his forecast for the economy that was released last April, and he is not expected to make any changes to the bank’s benchmark interest rate this week.

The USD/CAD broke through the $1.23 price level after an unexpected inflation boost gave the U.S. economy a lift. Wage increases in the American service sector have given the Federal Reserve hope that the economic malaise of the first quarter is truly a transitory event. Core inflation in Canada came in under expectations at 0.5% when 0.7% was forecast. Soft Canadian retail sales data kept the loonie low against the high-flying U.S. dollar.

To Poloz, a weaker loonie gives Canada a competitive advantage to boost exports, but the fact remains that the Canadian economy is failing to gain traction. The central bank will leave the benchmark untouched at 0.75% critics are increasingly calling for a rate cut, and it could come sooner than a hike since the Canadian economy has stalled.

For now, the loonie will continue to be under pressure. But with the Memorial Day holiday weekend in the U.S. ahead, and in a week with little American data due, it might get a reprieve after the BoC statement is released.

Central bank events to watch this week:

• Wednesday, May 27 10:00 a.m. – CAD Bank of Canada rate statement

*All times EDT

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