Bank of Canada leaves rates unchanged. Is it less hawkish now?

How many rate hikes are necessary to control inflation given that the BOC sees it returning to 2% over the long run?


The Bank of Canada left rates unchanged at all-time lows of 0.25%.  Markets were pricing in a near 60% chance of a hike prior to the meeting.  (See our Bank of Canada preview here)The BOC removed its exceptional forward guidance on interest rate policy now that it feels economic slack is absorbed.  In addition, the central bank is continuing its reinvestment phase, keeping its overall holdings of Government of Canada bonds roughly constant.  The BOC will consider exiting this phase and reducing the size of its balance sheet once it begins to raise interest rates.

The BOC also noted that they expect the Canadian economy to grow by 4% in 2022 and 3.5% in 2023.  This comes after a 4.5% growth rate in 2021.  In addition, the central bank expects inflation to remain close to 5% for the first half of 2022, and decline to about 3% as supply shortages diminish.  Long run expectations remain anchored near the 2% target.  BOC Governor, Tiff Macklem, said afterwards that Canadians can be confident the Bank of Canada is committed to bringing inflation down.

USD/CAD was volatile after the release as traders tried to determine if the BOC had turned more dovish.  The pair resolved to the upside after the first 15 minutes, trading from 1.2563 to 1.2645.

20220126 usdcad 15

Source: Tradingview, Stone X


The long-term head and shoulders pattern is now called into question on USD/CAD, the target of which is near previous lows at 1.2288.  After breaking the neckline of the pattern near 1.2600, price moved to and held the 200 Day Moving Average and an upward sloping trendline dating to June 1st, 2021. On January 24th, price bounced to resistance at the 50 Day Moving Average near 1.2700 and held.  This level is also the 50% retracement from the highs of December 20th, 2021 to the lows of January 19th.  USD/CAD is currently trading back at the necking of the head and shoulders pattern.  A close above the January 24th highs will invalidate the head and shoulders pattern.

20220126 usdcad daily

Source: Tradingview, Stone X

With the Bank of Canada leaving rates on hold, one has to consider when the first rate will come.  Tiff Macklem said in his press conference that interest rate hikes are needed to bring down inflation.  The question now becomes:  How many rate hikes are necessary to control inflation given that the BOC sees it returning to 2% over the long run? 


Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

Open an Account