The Bank of Canada kept the overnight interest rate at 5.00%, as expected. As stated, the BOC remains concerned about risks to the inflation outlook, particularly with regard to the persistence of underlying inflation. The central bank continues to monitor wage growth, corporate pricing practices, inflation forecasts and the supply and demand balance of the internal economy.
According to the BOC’s assessment, the economy will enter a period of stagnation, with first quarter GDP growth likely to remain close to zero. However, due to a boost in overseas demand, which is aiding the recovery in spending, as well as an anticipated pick-up in exports and business investment, growth is expected to strengthen gradually by mid-year.
In line with its October forecast, the BOC projects GDP growth of 0.8% by 2024. Looking ahead, the bank expects growth of 2.4%, which is stronger. With a year-end inflation rate of 3.4%, the BOC’s main concern is inflation. Housing spending remains a major contributor to inflation overshooting the target. The first half of the year will see the inflation rate hold at around 3%, according to the central bank’s prediction. After that, the rate will likely decline further and reach the 2% target by 2025.
Although the GDP forecast for 2024 is largely optimistic, the Bank of Canada remains concerned about continued inflation. This is consistent with the data recorded in December and highlights the central bank’s concern over the long-term nature of possible inflation. Although the rate hikes are practically considered complete, it is unlikely that they will lower rates unless inflation continues to improve. Regarding the 2025 projection, they most likely anticipate a significant upturn, after a phase of sluggish growth. This may involve low interest rates until 2025, which according to their model could be a factor supporting growth.
Tiff Macklem, governor of the BOC, challenged market forecasts of an upcoming rate cut. He expressed his concern over inflation risks, which may be greater than before and said that the current argument centers on how long they should maintain the current 5% policy rate.
From a technical perspective, USDCAD held below 1.3540 despite a strong recovery overnight, a boost from rising crude oil prices favoring the Canadian dollar as a commodity currency. Intraday bias remains neutral and more consolidation could be seen. However, further rally is expected as long as minor support at 1.3342 holds. The decline from 1.3898 should have completed at 1.3716. A break of the descending trendline and 1.3540 resistance could target 1.3617 (61.8%FR) price level. Minor support of 1.3413 will try to contain the downside, before touching 1.3342 support on the downside.
Meanwhile, USOIL crude oil prices continue to improve. Oil prices are on track to rise around 5% this week, as market fundamentals favor a bullish outlook. Official data showed that US crude inventories plunged by 9.2 million barrels last week, surpassing market expectations and marking the most significant decline since August.
Data also showed that the US economy grew faster than expected in the fourth quarter, while China announced it would cut bank reserve ratios next month and pledged to stabilize its capital market. On the supply side, geopolitical tensions flared in the Middle East this week, after US and UK forces launched more strikes on armed group targets in Yemen, increasing supply risks in the oil-producing region.
In Friday’s trading (Jan 26), USOil corrected below $77 per barrel, as China reportedly called on Iran to help contain Houthi attacks on Red Sea shipping or risk damaging business relations with Beijing, helping to ease market concerns about supply disruptions.
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Ady Phangestu
Market Analyst – HF Educational Office – Indonesia
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