CIBC economists note that the Bank of Canada's decision to leave interest rates unchanged was influenced by recent soft growth and labor market data. While the bank acknowledges inflationary pressures and wage growth, it also sees signs that previous monetary policy actions are having their intended effect. CIBC expects the policy rate to peak at 5% for this cycle due to anticipated increased labor market slack.

Key Points:

• Rates Unchanged: Given the recent economic data, it was not surprising that the BoC decided to keep interest rates stable.

• Inflation and Wages: The BoC cited that inflation pressures remain broad-based, and it has rejected the idea of removing the mortgage interest component in its inflation assessment. Wage growth is also strong, at 4-5%.

• Monetary Policy Impact: The BoC believes the impact of its previous rate hikes is starting to materialize, reflected in easing demand and increased labor market slack.

• Future Rate Hikes: The BoC has warned it's prepared to hike rates again if necessary to maintain its 2% inflation target.

• CIBC's Expectation: CIBC anticipates that the rate will peak at 5% due to an expected increase in labor market slack in the coming months.

Trading Recommendations:

• Prepare for Possible Volatility: Traders should be prepared for volatility, especially if the BoC decides to hike rates unexpectedly in response to inflationary pressures.

• Monitor Labor Market Data: Increased slack in the labor market could keep rates at 5%, so keep an eye on employment figures.

Implications:

For Traders:

• Rate Hike Risk: There's still risk of another rate hike, which should be factored into trading strategies.

• Currency Watch: Expect the Canadian Dollar to react to any changes in language around future rate hikes from the BoC.

For Policymakers:

• Clear Communication: Given the uncertainties, transparent communication about the BoC's views on inflation and labor market conditions will be crucial.

• Monitoring Inflation: Continued scrutiny of inflation data will be important for future policy decisions.

Conclusion:

CIBC expects that the Bank of Canada's rate will peak at 5% for this cycle, pointing to weak economic data and an increase in labor market slack as key factors. However, the BoC has indicated it is willing to hike again if needed, so traders and policymakers should remain vigilant.