The Week Ahead

During the week ahead the market is likely to look towards a number of key market themes and events which have the potential to indicate financial market moves.

The rate decision from the Reserve Bank of Australia and the Bank of Canada are the main events. Also, the ISM Services reading will be closely watched this week.

RBA Rate Decision

Last month the Reserve Bank of Australia raised the cash rate by 25 basis points to 2.85% during its November 2022 meeting, matching market forecasts.

The move marked the seventh straight rate hike, taking borrowing costs to a level not seen since April 2013, with the board mentioning further rate hikes will be needed as inflation in Australia is too high. 

Most economists predict that RBA is likely to hike rates again next week in which money markets had priced in a 70% chance for the central bank to increase the Cash Rate Target by 25bps to 3.10% and a 30% probability of the central bank maintaining the benchmark rate at the current 2.85%.

Expectations for the central bank to hike rates follows the last meeting where it maintained the slower pace of 25bps rate increases which was widely expected although there were outside calls for a return to a more aggressive move given the elevated inflation data from Australia.

The central bank’s comments at the meeting also lacked any major hawkish surprises as it reiterated that it expects to increase interest rates further over the period ahead and that the size and timing of future interest rate increases will continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labour market.

BOC Rate Decision

The Bank of Canada raised the target for its overnight rate by 50bps to 3.75% in its October 2022 meeting, below broad expectations that pointed to a more aggressive 75bps increase.

Still, it marked the sixth consecutive rate hike, adding to the 350bps in interest rate increases in the current tightening path and pushing borrowing costs to their highest since 2008.

This week it a tight call, with just under half of analysts surveyed by Reuters looking for a smaller 25bps move. Money market pricing, meanwhile, is tilted towards the smaller hike. Traders will also be looking out for any guidance about how close the central bank is to ending its hiking cycle.

The recent poll noted that although there was no clear consensus on where rates would top-out, 26 of the 29 surveyed see the terminal rate at 4.25% or higher, which suggests that the BoC could either be ready to conclude, or near concluding, its rate tightening; in October Governor Macklem hinted that the end of the cycle was near, but “we are not there yet,” he said.