Bank of Canada interest rate hike looks weaker as US inflation slows

Markets cut bets 60% to 45% after data shows cooling in US inflation

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Slowing US inflation is prompting traders to bet on a 75 basis point increase in Bank of Canada interest rates next month.

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Overnight swap markets suggest about a 45% chance that officials led by Governor Tiff Macklem will raise borrowing costs by three-quarters of a percentage point in their Sept. 7 decision. A measure of this magnitude would take the key rate to 3.25%, the highest since April 2008.

Bets were cut by around 60% earlier on Wednesday, before US consumer price data showed annual inflation slowing to 8.5%, a lower reading than forecasts. economists had predicted.

The downside surprise prompted traders to backtrack on bets on not just the Federal Reserve’s hiking trail, but also the Bank of Canada’s, on whether policymakers might need to tighten. financial conditions as quickly or as much as expected to curb price persistence. pressures.

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July inflation figures for Canada, due on Tuesday, will be a major determinant of bets going into the Bank of Canada’s next decision. Annual price increases hit 8.1% in June, the highest since early 1983.

If inflation decelerates or turns out to be peaking, Macklem and his officials could opt for a more modest rise after surprising markets in July with a 100 basis point move that they called “early loading.” But many analysts believe it is wiser to cut rates to more restrictive levels.

“The right thing to do for the Bank of Canada would be to raise 75,” Andrew Kelvin, senior strategist for Canada at the Toronto-Dominion Bank, said by email. « Just hitting the upper end of the neutral range is a pretty tentative response to the current inflation backdrop, but the data seems to give them room to slow down to 50. »

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