The Bank of Canada is facing a dilemma regarding its policy: on one hand, the economy needs support with falling oil prices. On the other hand, the low value of CAD is certainly supportive.
Here are views from two banks that see a cut coming:
Here is their view, courtesy of eFXnews:
Barclays:
We expect the BoC to cut its O/N rate 25bp at its meeting on Wednesday. Since the publication of BoC’s last Monetary Policy Report in October, the price of Western Canadian Select (WCS) has fallen by half. This has been only partially offset by the 8% nominal multilateral depreciation of the CAD. We estimate that to offset the effect on GDP of the drop in crude prices fully, the BoC would need to cut policy rates at least 50bp in 2016. There is a risk that the central bank decides to hold for now, but regardless, we believe the BoC will clearly indicate its dovish stance and signal further easing in the months to come.
In that regard, the release of the quarterly Monetary Policy Report next week will be closely watched, as it will update BoC views on the economic outlook and its forecasts about inflation and growth. The market is pricing in 20bp out of a 25bp cut for next week and a cumulative 40bp for all of 2016. Given the current market pricing and with no relief on sight for oil prices, we expect the CAD to weaken.
Nomura:
We believe the Bank of Canada will cut its policy rate by 25bp to 0.25% at this week’s meeting.The second oil price shock that saw Brent, WTI and WCS all fall well below the Bank’s assumptions laid out in October is a sound reason for the BoC to protect against further downside risk
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