The Bank of Canada increased interest rates by 25bps to 4.50% on January 25 as expected. The Bank of Canada has been reasonably happy with the progress made on inflation and communicated that it wants to keep rates as they are for a period of time. The Governing Council announced that it ‘expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases’.

What will the BoC need to see to hike rates again?

The BoC said at the end of its statement that the Governing Council is prepared to increase the policy rate further if needed to return inflation to the 2% target. In the press conference after the meeting Governor Macklem was asked specifically what he would need to see raise rates again. Macklem’s reply was that he, ‘will be looking for accumulation of evidence’. However, you can be sure that inflation data will be one key metric that has been showing a steady decline. You can see Canada’s core inflation has been falling from June’s peak of 6.2%.

So, will the BoC now cut rates?

Look at the short-term interest rate curve from the STIR markets. This shows that it is pricing in two rate cuts this year with a 4.00% rate for the end of the year. However, when Governor Macklem was asked about this he said that it was ‘far too early to be talking about interest rate cuts; pause gives them time to assess the economy’.

So watch the data

The CAD has been sold off quite heavily and any news of a return to hiking rates will strengthen the CAD. A good opportunity to look for would be surprisingly strong inflation/labour data which will put the pressure back on the BoC to start hiking rates again. The heavily sold CAD could then have a chance of a pop higher.