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The Bank of Canada (BoC) is expected not to change the policy interest rate of 0.25%. The evident weakness in inflation despite the steady recovery of the job market and economic growth is worrying and the prospects of lower rates for longer are set to drive the return for the USD demand, FXStreet’s analyst Joseph Trevisani briefs.

See – Bank of Canada Preview: Nine major banks expectations

Key quotes

“At its September meeting on Wednesday, the BoC is widely expected to hold the policy rate at 0.25% and permit inflation at a wider latitude effectively pinning rates at the zero bound for the foreseeable future.  Governor Tiff Macklem has recently indicated that the bank would not increase rates until 2023.”

“Despite the largely successful recovery of the Canadian economy from the artificial disaster of the closures, a number of factors will keep the BoC at the zero rate boundary for several years.” 

“The employment recovery is relative. Over one-third of laid-off workers are still unemployed. At some point, the economy will reach a point where the remaining layoffs are due to the failure of many businesses during the long shutdown. It may be years before the economy is robust enough to create replacements.” 

“The tenuous nature of the recovery in Canada is duplicated in much of the world and in the US, her largest market. Consequently, the demand for Canadian resources is likely to remain substandard. The recent collapse in crude oil is one sign of that weakness.”

“The inability of central banks to lift inflation to their targets, not only in Canada but globally will give the governors ample logic to emulate the Fed. Lower rates for longer. What was always a de facto rate policy will become de jure. As more and more central banks succumb to this reality the trading balance will begin to shift back to the US dollar. The recent reversal in the loonie suggests more losses ahead.”