Will They Cut? Bank of Canada Decision Tomorrow

 One year ago,  the Bank of Canada cut interest rates by 0.5% to 3%. Today we sit at a target rate of 0.5% and the question on every-one’s mind is: what will they do tomorrow?

In truth, it’s more like what can they do. With rates already at historical lows, another 0.25% cut will likely have a small impact on lending. Most economists are predicting the bank will stand pat and not cut. However, the futures market where people are placing bets on the decision tell a slightly different story:

Probability is the likelihood that the Bank of Canada will either increase or  
decrease the Overnight Target Rate.                                             
                                                                    
===========================================
 Meeting                 Implied     Implied      Prob. Of     Prob. Of       
  Date                       Rate            BP                 0.25%        0.50%          
—————————————————————————–
21-Apr-2009       0.3620      -13.80       55.21%       44.79%       

What we can decipher from the above table is that traders, or people who are willing to bet real money on where interest rates are headed, believe that there is a 55% chance that the Bank of Canada will cut interest rates 0.25% tomorrow, the opposite view of most economists.

Ultimately, cut or no cut, the main focus tomorrow will be on quantitative easing. In simple English, quantitative easing is simply when the governement creates (prints) more money and uses it to buy bonds. The result is often a jolt in the arm to the economy …… and inflation. For now inflation isn’t really a problem and the amounts of money needed to be printed will be modest. We’ll know more tomorrow at 9am Eastern when the Bank’s announcement is published.