First time released at it’s new scheduled time (Used to release at 10:00 ET)

The Bank of Canada Interest Rate Decision is the main monetary policy tool where the Bank of Canada’s Governing Council determines the official interest rate for the Canadian economy.
This rate, known as the overnight rate, influences short-term interest rates and serves as a key benchmark for borrowing costs in the country.

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Core inflation came in hotter than expected in December which rules out the Bank of Canada shifting meaningfully in a dovish direction at the January meeting. However, higher interest rates are biting and we continue to look for rate cuts from the second quarter onwards. US-dependent BoC rate expectations and the Canadian dollar may not move much for now.

What to Expect

The Bank of Canada uses this rate to achieve its inflation target and support overall economic goals. Changes in the interest rate can impact consumer spending, business investments, and inflation. It is widely expected that the BoC will leave rates unchanged at 5% for the fourth consecutive meeting.
If realized, attention will turn to the subsequent BoC rate statement for any clues on the future path of BoC interest rates. Any mention of more rate cuts this year than are already priced in by the markets could prompt strength in Canadian stocks and weakness in the Canadian dollar. However, hawkish remarks implying fewer interest rate cuts than are currently priced this year could result in the opposite.

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USD/CAD to stabilise

The rebound in USD/CAD to 1.35 is in line with a restrengthening of the USD primarily due to risk sentiment, positioning and seasonal factors, rather than a divergence in Fed-BoC policy patterns. In fact, the USD-CAD two-year swap rate gap has widened further in favour of CAD so far in January, from 20bp to 32bp. We expect the impact on CAD from this BoC policy meeting to be modestly positive as expectations of a radical dovish shift are scaled back. However, Governor Tiff Macklem already introduced the idea of rate cuts in a speech this month and will need to acknowledge the downward path for the policy rate to a certain extent. While waiting for the Fed meeting a week later and the crucial US CPI numbers for January, US-dependent rate expectations in Canada may not move much. USD/CAD may trace back to 1.34, but we don’t see much further downside for the pair this quarter as USD shows the last bits of strength.

Sources: ING Think