Canadian Dollar could Rebound on Rising Expectations of Rate Hike, Despite Weak Nov Retail Sales

On Friday, the Canadian currency fell beyond $1.25, its lowest level since January 14th, as investors flee risky investments.Softer-than-anticipated earnings from corporations that rose during the epidemic began to weigh on the US stock market, as tensions between Russia and NATO over Ukraine boosted demand for safe-haven assets.

Locally, retail sales grew just 0.7 percent in November, missing original predictions of a 1.2 percent gain, while December sales decreased 2.1 percent. Additionally, the loonie is being weighed down by the recent decrease in oil prices from a seven-year high.

Nonetheless, the Canadian dollar may recover in the coming days as prospects for a rate rise this week grow. The possibility of the Bank of Canada raising interest rates next week is increasing as record inflationary pressure and high home prices overlap with a predicted economic recovery from the pandemic’s Omicron wave, according to some experts.

Scotiabank Economics stated Wednesday in a letter to clients that it anticipates the Bank of Canada to increase its benchmark lending rate by 25 basis points to 0.5% at its upcoming meeting on January 26.

This would be the foremost of many rate rises this year, according to senior economist Jean-Francois Perrault, with rates reaching 2% by the end of this year. While the central bank of Canada indicated at the close of 2021that interest rate rises were probable in 2022, it had previously indicated that prospective increases would occur in the middle of 2022.

However, Perrault stated in his writeup that the central bank may be obliged to move quicker than expected after Statistics Canada’s announcement on Wednesday that annual inflationary rate reached 4.8 percent in December, the highest point in three decades.

“Notwithstanding Omicron’s apparent, but transitory, negative effect on economic activity, it is apparent that inflationary pressures are greater than previously estimated, necessitating a more forceful monetary policy reaction,” he said. In a conversation with Global News, James Orlando, a senior economist at TD Economics, said that the circumstances are favorable for a benchmark rate rise in the near future.

“The Bank of Canada is in a situation right now where inflation is at an uncomfortably high level, the economy is booming, and we’re likely to make a big recovery from this Omicron time period,” he added. “The Bank of Canada’s urgent need to boost interest rates is genuine.”

Orlando also expects the raise will begin at 25 basis points, saying that the central bank would not want to “shock people” after almost two years of rock-bottom interest rates connected to the epidemic. Though markets have priced in an interest rate rise on Jan. 26, Orlando believes the bank may delay its announcement until March to allow the Omicron wave to subside and firms to recover.

“However, with everyone anticipating it, the Bank of Canada’s question is, why should they wait?” he says. Stephen Tapp, the Canadian Chamber of Commerce’s senior economist, concurs.
“My anticipation is that a rate rise will very probably occur next Wednesday,” he tells Global News.

He and Orlando asserted that the Bank of Canada would be able to correlate an interest rate rise to the release of a monetary policy report the following day. Both said that the rise may be delayed until March if governors are concerned about the Omicron recovery, but a notice of an impending increase would be appropriate for next week.

Tapp asserts that inflation is now having a dual impact on firms. Not only are their prices increasing as a result of higher-priced items, but a projected need to raise pay in 2022 to keep up with inflationary pressures will continue to weigh on their bottom lines. While the central bank may be under pressure to boost interest rates in order to contain inflation, some of the factors driving price increases may be beyond its control.

“The Bank of Canada has few options for addressing the primary source of inflation, which is pandemic-induced supply chain disruptions,” says Tu Nguyen, an economist at accounting firm RSM Canada.
Nguyen and the majority of other economists interviewed by Global News this week predicted that inflation would linger at 5% for the next few months but will finally fall to 3% by the end of the year, closer to the upper limit of the Bank of Canada’s projected range.

Additionally, record-high property prices are increasing pressure on the Bank of Canada to intervene. According to Orlando, Canada’s housing market might accelerate faster if the Bank of Canada does not begin raising its overnight lending rates.

“As housing values rise, individuals take on larger and larger mortgages, leveraging themselves to uncomfortably high levels,” he explains. “And therefore, you exacerbate the economy’s susceptibility.”