- BoC seen raising rates but are markets expecting too much?
- BoE Deputy Governor casts doubt on UK rate hike;
- USDCAD could be extremely lively as Yellen testifies on monetary policy.
Wednesday promises to be quite an entertaining day for markets, with central banks once again the focus as the Bank of Canada announces its latest monetary policy decision and Federal Reserve Chair Janet Yellen begins her two day testimony, firstly before the House Financial Services Committee.
The BoC has come to the fore in recent weeks, adopting a far more hawkish stance on interest rates, so much so that markets are now almost fully pricing in a rate hike this year. This comes despite inflation in the country currently sitting well below the central bank’s target and the economy doing quite well – despite a far more upbeat assessment this week from the country’s finance minister Bill Morneau – albeit with a number of potentially destabilising headwinds.
Still, key officials at the central bank have spoken in recent weeks and markets have listened, positioning themselves for a hike and possibly more in the pipeline. Investors have actually taken it on board so much that the downside risks now come from the central bank waiting to hike, an outcome that could hit the Canadian dollar quite hard and cast doubt on just how serious policy makers really are.
The sudden desire to raise interest rates at the BoC comes at the same time as their counterparts at the Bank of England have also struck a more hawkish tone. Despite the significant economic uncertainty linked to Brexit and the weakness we’re already seeing as a result of last year’s vote, there appears to be a growing consensus at the bank to raise interest rates in order to offset the rising inflationary pressures that are largely being driven by the depreciation of the currency. Still, not everyone is convinced and Deputy Governor Ben Broadbent this morning appears to have joined Governor Mark Carney in stating that it’s not the time to raise interest rates. Broadbent was being seen as the proxy for whether the consensus has shifted and his comments today – which hit the pound in early trade – suggest there may still be some way to go, although future votes are likely to be very close.
One central bank who’s monetary policy stance has barely shifted this year, if at all, is the Fed. Markets may not yet be convinced that we’ll get a third rate hike this year but they’re not dismissing it as they have in the past, either. Yellen’s testimony on the semi-annual monetary policy report will be watched very closely today for signs that the central bank is pulling back at all from its calls for another hike, amid signs that some policy makers are becoming less convinced due to low inflation.
Yellen will likely be quizzed on a number of issues related to the Fed’s plans – among other things if past testimonies are anything to go by – including its plans for interest rates beyond the end of the year and its balance sheet, which it is expected to begin unwinding as early as September. Yellen likes to keep her cards very close to her chest though so may give little new information away today, not that this often stops markets getting carried away. With her testimony coming at the same time as the BoC’s rate decision and press conference, USDCAD will likely be extremely lively today.
