Bank Of Canada Boosts Hopes Of A Less Hawkish Fed

Key Insights

• The BoC surprised markets by raising the rate to 3.75%. 
• The Bank looks worried about the negative impact of higher interest rates on the Canadian economy. 
• Traders wonder whether Fed’s thinking process may be similar as higher interest rates have already hit the housing market in the U.S. 

Bank Of Canada Raises The Rate To 3.75%

The Bank of Canada surprised markets by raising the rate from 3.25% to 3.75%, compared to analyst consensus of 4.00%. This move had a significant impact on the world’s markets as it raised hopes that the Fed could do the same.

The BoC noted that Canada’s inflation remained high as households and businesses wanted to buy more goods and services than the economy could produce. At the same time, higher interest rates have started to weigh on growth, which was evident in areas like housing.

BoC noted that it was “trying to balance between the risks of under- and over-tightening”. The Bank also added that it was getting closer to the end of the tightening phase.

The markets interpreted BoC’s move as a sign that the central bank did not want to crush economy with high interest rates. The key decision for global markets will be released on November 2, when the Fed will announce its interest rate decision.

Markets Price In A 89.3% Probability Of A 75 Bps Rate Hike At The Next Fed Meeting On November 2

Currently, markets expect that the Fed will increase the interest rate from 3.25% to 4.00%. Traders had the same expectations for the BoC Interest Rate Decision, but the Bank pushed the rate to just 3.75%.

According to the FedWatch Tool, the probability of a 75 bps rate hike at the next Fed meeting is 89.3%. Markets expect that this rate hike will be followed by a 50 bps hike at the meeting in December. It should be noted that traders believe that the Fed will continue to raise rates in 2023, but any dovish signals may change the market’s view.

The Fed may not be ready for a surprising 50 bps hike, but it may signal that it will decrease the pace of rate hikes at the next meetings.

Markets have started to price in the rising probability of this scenario. S&P 500 tested multi-week highs despite disappointing earnings reports from Alphabet and Microsoft. Bond markets rallied. Commodities like oil and copper gained strong upside momentum on hopes that the Fed will be less hawkish, which will be good for the economy.

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