KEY POINTS:
- BoC is expected to hold interest rates steady at 2.25%
- The central bank will likely scrap the caveats for further easing effectively marking the end of the easing cycle
- The market has fully priced in a rate hike in 2026, but the BoC is unlikely to validate that just yet
- Given the caveats in the strong Canadian data, Governor Macklem should still sound cautious but keep options on the table
The Bank of Canada (BoC) is widely expected to leave interest rates unchanged at 2.25%. That would keep interest rates at the lower bound of the central bank's estimated neutral range of 2.25-3.25%. We won't get the economic projections at this decision.
The BoC will likely scrap any signal to further easing to solidly confirm the end of the easing cycle, but not validate the rate hike bets just yet. Governor Macklem is expected to sound cautious about the recent economic data but still more hawkish than his previous press conferences.
STATAMENT
At the last decision, the central bank cut interest rates to 2.25% and signalled the move to the sidelines while keeping some caveats in the statement. We should see some notable changes.
The central bank should acknowledge the recent improvement in GDP but also highlight the weak details, keeping it a bit cautious. They should admit the strength in the labour market though despite the drop in full-time jobs. The outlook around inflation will likely remain unchanged as the Bank continues to see inflation in check for now.
The "Governing Council sees the current policy rate at about the right level" could see a slight change to a stronger neutral stance by scrapping the "about".
PRESS CONFERENCE
Governor Macklem is expected to strike a cautious tone while delivering a stronger neutral message and indicating the readiness to respond if the outlook were to change.
He's likely to highlight the caveats in the recent GDP and labour market reports. In fact, GDP strength was mostly due to a big drop in imports and the advance October GDP reading showed -0.3% contraction.
On the labour market data side, there's no doubt it's been on a hot streak and the latest release showed the biggest drop in the unemployment rate in 20 years (excluding Covid). The only negative part was the loss in full-time jobs.
MARKET PRICING
- December cut: 0% probability
- 2026 hike: 100% probability
- Total 2026 tightening: 35 bps
MARKET REACTION
Given the expectations and market pricing, it's unlikely to see big moves for the CAD today (especially considering the focus on the FOMC decision).
The central bank will need to push back on the market pricing to see notable CAD weakness or open the door for rate hikes to give the CAD some further boost.
