The Bank of Canada was fully expected to raise rates by a quarter of a percent today and that is exactly what we got. The new target rate moves up to 4.5% - matching the level we saw before the financial crisis. What was a surprise today was the language of the accompanying policy statement, where the Bank indicated that it "expects to hold rates" while it assesses the the impact from previous hikes.  

The Bank does indicate that inflation has slowed due to weaker gasoline prices, but as I have discussed in recent weeks, even the drop in gasoline may be transitory. Case in point, take a look at where pump prices are today versus December. In addition, the pace of core inflation remains much higher than what the Bank wants and demand conditions have not weakened to a point where major improvements in core can take place. Therefore, it is important to distinguish between the verbage of holding and where we finally end up in terms of rates. In other words, 4.5% may not be the peak this cycle. 

While the Canadian dollar has fallen on what was, on the surface, a dovish statement and short-term bond yields have declined, I would caution about reading too much into this decision and reference to pause. In fact, the Bank does state that it will resume tightening if it doesn't see the progress it wants on inflation. The other cautionary note here is to not infer that the Federal Reserve will deliver the same guidance to pause when it meets on February 1st. We still believe that the tightening cycle, while getting close to the end, is going to continue a little longer until services inflation is truly brought under control. That suggests that both bonds and equities right now are overbought and defensive positions is still warranted.