17 Feb 2015
Expectations for a March rate cut by BoC increasing – BAML
FXStreet (Barcelona) - The Research Team at BofA-Merrill Lynch, forecasts Canada to see a 25bp rate cut in March, with market pricing for the rate cut by BoC increasing significantly to around 60% from previous 20%.
Key Quotes
“In our view, not only would the further decline in oil prices that we expect maintain pressure on CAD valuations, it would also raise risks for the BoC to engage in significant easing.”
“The BoC eased policy in January to “provide insurance” against downside risks emanating from the oil price shock on growth, inflation, and financial stability. According to the Bank’s January Monetary Policy (MPR) report, its forecast assumes WTI prices of $60/bbl.”
“Prices still remain over 10% below the Bank’s forecast level, likely meaning the BoC will have to ease further if they stay near current levels or fall further toward our $32/bbl forecasts.”
“As Senior Deputy Governor Carolyn Wilkins noted last week, “If oil prices were to average $60 per barrel and monetary policy did not respond, gross domestic income would be about 4 1/2 per cent lower by the end of 2016”1 implying prices below that level would require further easing, consistent with our call for another cut in March.”
“Since the January meeting, policy expectations have shifted aggressively. Prior to the meeting, less than a 20% chance of a cut was priced in over the next six months. Now, the market is pricing in roughly a 60% chance of a cut at the March meeting.”
“Given our call for a 25bp cut, we would expect CAD to come under pressure as this gets fully priced.”
“Additionally, the probability of a further cut (not our base case) is less than 50%.”
Key Quotes
“In our view, not only would the further decline in oil prices that we expect maintain pressure on CAD valuations, it would also raise risks for the BoC to engage in significant easing.”
“The BoC eased policy in January to “provide insurance” against downside risks emanating from the oil price shock on growth, inflation, and financial stability. According to the Bank’s January Monetary Policy (MPR) report, its forecast assumes WTI prices of $60/bbl.”
“Prices still remain over 10% below the Bank’s forecast level, likely meaning the BoC will have to ease further if they stay near current levels or fall further toward our $32/bbl forecasts.”
“As Senior Deputy Governor Carolyn Wilkins noted last week, “If oil prices were to average $60 per barrel and monetary policy did not respond, gross domestic income would be about 4 1/2 per cent lower by the end of 2016”1 implying prices below that level would require further easing, consistent with our call for another cut in March.”
“Since the January meeting, policy expectations have shifted aggressively. Prior to the meeting, less than a 20% chance of a cut was priced in over the next six months. Now, the market is pricing in roughly a 60% chance of a cut at the March meeting.”
“Given our call for a 25bp cut, we would expect CAD to come under pressure as this gets fully priced.”
“Additionally, the probability of a further cut (not our base case) is less than 50%.”