Interest Rate Bets in Flux: Traders React to Bank of Canada Decision, Surprise US Inflation Data

Today’s Bank of Canada (BoC) decision to maintain its key interest rate at 5% sparked volatile reactions among traders seeking to predict the timing of future monetary easing. Further complicating the outlook, a surprise spike in US inflation figures added to the uncertainty.

Shifting Expectations for June

As Governor Macklem delivered his press conference, implied probabilities for a June rate cut fluctuated dramatically, ultimately settling around 58%. One of our analysts highlights that these odds represent a notable drop from the 70% chance that the market priced in ahead of the announcement. The initial market response, with traders initially reducing the likelihood of a June cut, suggests that the BoC statement was interpreted by some as adopting a slightly more hawkish tone.

Governor Macklem’s Impact

Governor Macklem’s remarks, which reiterated that a June rate cut remains “within the realm of possibilities,” appear to have fueled renewed optimism among some traders. This emphasis on maintaining flexibility, according to one of our analysts, likely contributed to the subsequent rebound in projected odds for a June move.

July Outlook Holds Steady

Implied probabilities for a July rate cut remain largely unchanged at approximately 79%, indicating that traders continue to view a cut within that timeframe as a strong possibility.

Surprise US Inflation Sends Shockwaves

The release of higher-than-expected US inflation figures this morning had far-reaching implications. The resulting surge in the US dollar put downward pressure on the Canadian currency, while both Canadian and US bond yields spiked significantly. This, in turn, suggests that fixed mortgage rates may face upward pressure in the coming period. As a result of the US data, traders have drastically reduced their expectations of a Federal Reserve rate cut in June to a mere 10% probability.

BoC Policy Outlook: Rate Cuts on Hold, Growth Forecast Revised

The BoC’s decision to maintain its key interest rate aligns with its commitment to await further evidence of a sustained decline in inflation. Notably, the bank revised its growth forecast for 2024 upwards in its quarterly Monetary Policy Report.

The path of Canadian interest rates remains in flux and will likely be marked by continued volatility as market participants weigh domestic and international factors and attempt to predict the next steps of the BoC.