What to Expect from Bank of Canada, ECB Interest Rate Decisions
When it comes to monetary policy, the Bank of Canada (BoC) falls somewhere between the dovishness of the Bank of Japan and the Federal Reserve’s hawkish tightening.
This is in line with the relative pace of rising prices in Canada compared to the US or the EU where inflation levels range between 8 and 10 percent, and Japan where they hover at around 3 percent.
The BoC’s middle-of-the-road approach might soon change after September’s inflation figures came in higher than expected at the level of 6.9 percent versus the consensus forecast of 6.7 percent.
The central bank meets on Wednesday, October 26, to announce its interest rate decision. The BoC is expected to hike its interest rate guidance which currently stands at 3.25 percent. Market consensus projects that guidance might rise from 3.25 percent to 3.75 percent or 4 percent.
However, the anticipated result may contain surprises given the latest upward trend in inflation.
The more extreme scenario is for the BoC to raise its guidance for interest rates by 1 percentage point, but this possibility adds risks to economic growth. Canada’s Gross Domestic Product (GDP) saw four consecutive quarters of real GDP growth up to the end of the second quarter of this year, when the economy grew by 0.8 percent. GDP growth for June, July and August was around 0.1 percent per month. Relative to the US, Canada’s economic growth is in positive territory but cannot be described as robust.
Would the BoC risk weakening investor confidence and consumer spending by hiking interest rates by 1 percent? The answer to that question will come in the October meeting.
The European Central Bank (ECB) is dealing with higher inflation rates in Europe and has grown increasingly hawkish about monetary tightening. At the same time, the central bank is wary about the weakness of the bloc’s economy because of the risks from the war in Ukraine.
The central bank meets on Thursday, October 27, and is expected to hike its key interest rate guidance from 1.25 percent to 2 percent.
Will the ECB’s cautiousness about economic growth outweigh the rising inflation rates in the EU? The central bank’s main remit is to maintain price stability but after September’s Consumer Price Index (CPI) reached 10 percent and prices heated up across Europe, the balance of the scales may tip towards more aggressive interest rate hikes in the coming months.
To conclude, both central banks are under pressure to tamp down inflation, so there may be unexpected results in the upcoming monetary policy decisions.
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