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Loonie Tumbles After BOC Warns There Is “Increased Uncertainty” About Future Rate Hikes

Loonie Tumbles After BOC Warns There Is “Increased Uncertainty” About Future Rate Hikes

Another central bank appears to be throwing in the towel on any future rate hikes.

Just days after Canada reported an abysmal December GDP print, which declined for the second consecutive month and sparked fears of an imminent technical recession…

… the Bank of Canada today kept its rate unchanged at 1.75%, as expected, however the statement was so dovish it shocked the market, which sent the Loonie tumbling.

In keeping the rate flat, the Bank of Canada acknowledged the “mixed” data picture, which suggests “increased uncertainty” about timing of “future rate increases”, and said lower than neutral interest rates are “warranted” given outlook, confirming that just like the Fed, the BOC is now also on “pause.”

Indeed, in borrowing a page from the Fed’s playbook, the BOC said the “outlook continues to warrant a policy interest rate that is below its neutral range” and added that “with increased uncertainty about the timing of future rate increases, Governing Council will be watching closely developments in household spending, oil markets, and global trade policy.”

The BOC also said that given the “mixed” data picture, “it will take time to gauge the persistence of below-potential growth and the implications for the inflation outlook.”

Finally, admitting that it too was too optimistic heading into 2019, the bank said that “the slowdown in the fourth quarter was sharper and more broadly based” as “consumer spending and the housing market were soft, despite strong growth in employment and labour income. Both exports and business investment also fell short of expectations.”

Following the sharply dovish announcement, the loonie tumbled  further and Canadian bond yields extend declines: the USD/CAD jumped +0.6% at ~1.3426 after rising as much as 0.7% as stops were triggered, rising as high as 1.3441.

The good news for loonie bulls? At least the BOC isn’t discussing rate cuts just yet. That said, Rabobank notes that it does “not expect any further rate increases this cycle and expect the BoC to cut rates 25bp in 2020 Q2.”

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