While consensus for this morning’s Bank of Canada policy meeting was for a half-point rate hike, there was a sizable number of calls for only a quarter-point. This stemmed from the fact that the October meeting saw Governor Macklem and council opt for only a half-point move, instead of expectations of another 75bp lift. That this decision was made after a couple of politicians voiced opposition to further aggressive tightening, suggested that the Bank was becoming more sensitive to pressures on housing and consumers.  Today’s decision to stick to a 50bp increase in the overnight rate target to 4.25% highlights that the Bank is still laser focused on getting inflation down, in light of the resiliency in the economy shown in the third quarter and the continued large price increases in many goods and services.

 

The Bank did extend a bit of an olive branch in an important change in the statement’s language.  In October, it said that it expected “that the policy interest rate will need to rise further”, whereas in today’s announcement, it indicated that the “Governing Council will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target”.  This is a subtle change, however, it does suggest that the next move may be either a quarter-point increase or perhaps nothing at all.

Actually, today’s policy statement contained numerous changes from October, highlighting how quickly economic fundamentals are shifting. For example, in October it stated that talked about strength in the global economy and supply disruptions.  Today, it talked about slowing global growth, a weakening US economy and gradual easing in bottlenecks.

 

In terms of the outlook for rates, it does appear likely that we will see the overnight rate target return to the high of 4.5% seen before the financial crisis, but the Bank is not giving away any hints as to whether it is thinking of a quick reversal in rates should economic conditions deteriorate rapidly. For floating-rate borrowers, today’s move is going to be a bit of a shock, though we would argue that the decision probably doesn’t change where the terminal rate will be. Bond yields did move higher on the announcement, but a 4bp lift in the 2yr yield to 3.83% is relatively modest. That being said, US yields have tumbled this morning on recession fears, so even a moderate rise in Canadian yields sticks out. We continue to like the long-end of the market, even with the strength seen since October when we started extending duration, as equity nervousness should see a safe haven flight.

 

Andrew Pyle