Pound to Canadian Dollar Weekly Forecast: Bank of England Pushes Back Against Interest Rate Cuts

November 22, 2023 - Written by John Cameron

STORY LINK Pound to Canadian Dollar Weekly Forecast: Bank of England Pushes Back Against Interest Rate Cuts

Hawkish comments from Bank of England officials and expectations of tax cuts have boosted the Pound on Tuesday.

The Canadian inflation data had a measured impact, but reinforced expectations that the Bank of Canada would leave rates on hold at the December meeting.

The Pound to Canadian dollar (GBP/CAD) inflation rate secured a further advance on the day to 11-week highs at 1.7220 before a limited correction to 1.7180.

Monetary and fiscal policy developments will remain key elements for both the Pound and Canadian dollar.

Canadian consumer prices increased 0.1% for October, in line with consensus forecasts, while the headline inflation rate declined more than expected to 3.1% from 3.8% and compared with expectations of 3.2%.

The core rate edged lower to 2.7% from 2.8% and there were limited net declines in all the Bank of Canada core inflation rates.

There was a sharp decline in gasoline prices with a 7.8% annual decline and, excluding gasoline, the inflation rate was 3.6%.

According to Scotiabank; The CAD may slip a bit on lower headline inflation data but the elevated core prices will keep the BoC sounding relatively hawkish and limit CAD losses.

Scotiabank noted that the Bank of Canada remains concerned over underlying inflation trends. It noted; “The recent summary of policymakers’ deliberations around the last policy decision dwelt on inflation risks and the fact that core Median inflation had been stuck in a range of 3.5-4% on a 3m annualized basis for the past year (see chart).

It added; “Policymakers are clearly concerned that progress on curbing core price growth has stalled in recent months.”

The government will also release its fiscal update during Tuesday.

According to media reports, new measures will include C$15 billion for 10-year loans for new rental housing construction, a $1-billion fund dedicated to getting more affordable housing built, and new mortgage rules for lenders dealing with homeowners at risk.

Scotiabank notes that the central bank will be monitoring fiscal developments; “Governor Macklem is talking about inflation tomorrow and may reflect on how heavy spending at all levels of government has complicated the fight against price growth.”

Fiscal and monetary policy developments will also be important for the Pound.

In testimony to the Treasury Select Committee on Tuesday, Bank of England Governor Bailey stated that inflation was on track to get back to the central bank's 2% target but there were risks that price growth could get stuck at a high level. He added that the risks were on the upside.

There were further hawkish comments from MPC member Mann who pointed to corporate surveys which suggested that wage and prices increases would remain elevated in 2024.

According to Simon Harvey, head of FX analysis at Monex Europe; "They (the Bank of England) are trying to retain the option to hike again if needed and at a minimum delay markets pre-emptively pricing any easing."

Scotiabank noted; “Sterling is a little higher on the session; hawkish comments from BoE Governor Baily and MPC member Mann are helping lift sterling somewhat even though swaps have not reacted.”

There was little net change in money markets with futures indicating that rates are likely to decline by around 70 basis points by the end of next year.

According to Scotiabank; “Fiscal policy will also be a key element; “The Chancellor’s Autumn Statement may deliver some good news (for voters) in the form of tax cuts this week, with government borrowing estimates running 15% below forecasts, despite today’s October data earlier reflecting a significantly larger than expected borrowing requirement last month.”

Goldman Sachs economist James Moberly expects only limited action; "We think that larger tax cuts are less likely at the Autumn Statement, with the government instead likely to conserve most of its headroom for the Spring Budget."

MUFG does expect a Pound reaction; “The fiscal announcement could lift short-term UK yields and the pound.”

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