Analysis
Five Central Banks in Three Days: the Bank of Canada May Raise Rates for the First Time Since 2023, While the Fed, ECB and BoJ Are Expected to Wait
Five central banks decide between Wednesday and Friday, and only two are expected to move. Markets price about an 80% chance that New Zealand raises rates, and 19 of 34 economists in a Reuters poll expect the Bank of Canada to hike to 2.50%. The Fed, the ECB and the Bank of Japan are all expected to hold, with December hikes priced for each. The currencies will trade the surprises.
The week that has the Federal Reserve and the largest US technology reports on the same Wednesday also has four other central banks in it. In order: the Reserve Bank of New Zealand at 2:00 p.m. on Wednesday in Wellington, 9 p.m. on Tuesday in New York; the Bank of Canada at 9:45 a.m. Eastern on Wednesday; the Fed at 2:00 p.m. the same day; the European Central Bank at 14:15 Frankfurt time on Thursday; and the Bank of Japan around midday in Tokyo on Friday, late on Thursday evening in New York. All of them face the same problem, oil above $110 and inflation that has stopped falling, and they are expected to answer it differently.
Canada is the one most likely to surprise in either direction. Nineteen of 34 economists polled by Reuters from October 21 to 23 expect the Bank of Canada to raise its overnight rate by a quarter point to 2.50%, its first increase since 2023 and its first move of any kind in a year; in the previous poll 80% had expected it to hold through the end of 2026. Interest-rate futures moved from about a 30% chance of a hike to roughly 75% after Governor Tiff Macklem's remarks the previous weekend, which markets read as a signal, and after September inflation rose to 3.1%, just above the bank's 1% to 3% range. "They'd rather make the mistake of hiking a little bit too early," BMO's Benjamin Reitzes told Reuters. The other side of the argument is an economy that shed jobs in August and September and grew about 1.9% in the third quarter, down from 3.3%. The Canadian dollar has already moved: the US dollar fell from about 1.4217 Canadian dollars on October 13 to about 1.40 by Thursday.
New Zealand is priced for a move with less debate. Markets put the odds of a quarter-point increase in the official cash rate, from 2.75% to 3.00%, at about 80% to 85% as of October 19, according to a pre-meeting review by Admiral Markets, with BNZ and ASB expecting a hike and Westpac a pause until December. Second-quarter inflation was 4.1%, well above the 1% to 3% target.
The three largest are expected to wait, and to say they are not done. The Fed is priced at only about 5% to 7% for a hike on Wednesday and about 80% for one in December, with the target range at 3.75% to 4.00% after September's increase. The ECB, at 2.50% on the deposit rate after hikes in June and September, is expected to hold by 70 of 73 economists in a Reuters poll, with 64 expecting another increase in December; euro-area inflation was 3.8% in September, the highest since September 2023. The Bank of Japan, at 1.25% after its September hike, the highest since 1995, is priced at under 5% for a move on Friday and about 80% for December, and it publishes a new Outlook Report the same day.
For currency traders the arithmetic is about surprises, not levels. Going into the week the euro was at $1.1204, the dollar at ¥156.81 after a fall from ¥158.52 on October 19, and the New Zealand dollar near $0.5685. A Canadian hold, a New Zealand pause or a Fed chair who sounds more certain about December than the market are the three outcomes most likely to move their currencies by more than a cent in a minute, and all three could happen within 18 hours of each other.