The Canadian dollar showed minimal reaction as the Bank of Canada reduced its key interest rate to 4.5%
The Bank of Canada has reduced its key interest rate for the second time this year to 4.5 percent.
According to BNN Bloomberg, this decision has several implications for the Canadian dollar.
The Canadian dollar, or loonie, showed little reaction to the rate cut as it was already anticipated. Rishi Sondhi, a senior economist at TD Bank Group, noted that the loonie briefly dipped from around 72.55 to 72.44 shortly after the announcement.
However, it rebounded to approximately 72.52 following the press conference, as reported by XE.com.
The divergence between the Bank of Canada's rate cuts and the US Federal Reserve's stable rates could pressure the Canadian dollar. Although the loonie didn't drop significantly on Wednesday, it has decreased by about a cent over the past month.
This decline is due to expectations of rate cuts driven by inflation, GDP, and job numbers. Governor Tiff Macklem of the Bank of Canada stated that he doesn't foresee major issues from this divergence, as the US may also reduce rates soon.
“With inflation showing more signs of easing in the United States, my sense is that divergence is not going to be particularly serious,” Macklem said.
A lower Canadian dollar increases the cost of imports, adding to inflation pressures. However, Sondhi pointed out that the loonie has traded at similar levels for the past two years, so these inflation pressures are already accounted for.
He added that the Canadian economy's shift towards services reduces its vulnerability to import-driven inflation, even in categories like imported food, where domestic retail costs play a significant role.
Sondhi also highlighted the Canadian dollar's relative stability, noting it has remained between 72 and 76 cents for the past two years.
“It’s actually been a remarkably stable currency ... it’s obviously on the lower end of that range right now, so it’s still low, but I think it’s important to note that it has been rangebound,” he said.
Looking ahead, Sondhi predicts the Canadian dollar will maintain its current levels throughout the year. Both the Bank of Canada and the US Federal Reserve are expected to cut rates.
TD Bank forecasts the Bank of Canada's rate to drop to 4.25 percent by the end of the year, with potential for further reductions. The financial markets have already priced in the first US rate cut for September, with additional decisions expected in November and December.
