Posthaste: Canadian dollar could throw wrench into Bank of Canada rate cuts
Conditions are shaping up for the Bank of Canada to start cutting interest rates, but will our currency throw a wrench in the works?
Expectations that Canada’s central bank will move before the United States Federal Reserve has put pressure on the loonie, which has dropped 1.7 per cent against a strong U.S. dollar.
The Canadian dollar fell again yesterday after weaker retail sales data added to the case for rate cuts.
As the gap between the two central banks’ policy paths widens, the loonie’s outlook dims.
While the Bank of Canada is expected to cut rates in June or July, predictions for the Fed’s first cut have been pushed back to December, with some questioning whether it will cut at all this year.
The Bank of Canada is expected to trim 100 to 125 basis points off its 5 per cent rate this year; the Fed only 25 bps.
How big this gap gets is a key question for the Canadian dollar.
BofA Global Research has cut its outlook for the currency on signs the divergence will be wider than previously expected.
It now forecasts the Canadian dollar will fall to 72.99 US cents in the second quarter of this year, and reach 75.75 US cents by the end of 2025, down from its earlier forecast of 76.9 US cents.
A weaker Canadian dollar raises the risks of inflation as goods become more expensive to import. BofA estimates that each big drop in the Canadian dollar could add 15 bps to the consumer price index. If the gap between the two central banks grows wide enough to push the loonie down to 69 US cents it could hike inflation by a full percentage point, they said.
“For now, we believe the BoC would likely tolerate some short-term loonie weakness as it looks to embark on the rate cutting cycle,” said BofA strategist
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