BoC is widely anticipated to lower its policy rate by 50bps to 3.75% today, marking the fourth consecutive rate cut. The central bank is stepping up its monetary easing, as policymakers are increasingly worried that the current high level of interest rates is causing additional economic pain.
Recent economic indicators support the case for the more aggressive adjustment. Unemployment rate surged to a seven-year high (excluding the pandemic period) of 6.6% in August before dipping slightly to 6.5% in September. Even at 6.5%, unemployment remains a full percentage point higher than a year earlier. Additionally, per capita GDP has contracted for five consecutive quarters. With inflation falling more rapidly to 1.6% in September, the BoC has room to act swiftly.
The key question now is the pace of future policy easing. There are firm expectations that the interest rate will fall to a neutral range between 2.25% and 3.25% by the end of next year. Among major financial institutions, Scotiabank is forecasting a more conservative year-end policy rate of 3.00%, while National Bank and RBC anticipate a more aggressive path to 2.00% by the end of 2025. These projections will likely be reassessed based on BoC’s new economic forecasts released today.
Technically, USD/CAD’s near term rally from 1.3418 is in progress for 1.3946/76 resistance zone. However, for now, it’s certain whether the medium term consolidation pattern from 1.3976 (2022 high) has completed as a triangle at 1.3418. So, strong resistance might be seen from 1.3976 to limit upside again. USD/CAD would likely need a more pronounced divergence in monetary policy between Fed and BoC to break decisively above 1.3976.
