Notes from the Desk – The BoC Announcement: Reading The Tea Leaves
The fact the BoC hiked 50 bps taking the overnight rate to 4.25% falls into the ‘who cares’ category. The more important part of today’s announcement was the language that accompanied the hike.
- The BoC is no longer on auto-pilot mode with rate hikes and is now fully data-dependent. This means at future meetings, the decision to move or now will depend on how the economic data unfolds.
- Previously in these meetings, they warned markets that rates ‘will need to rise further’, but today they concluded with they will be ‘considering whether the policy interest rate needs to rise further’.
- The BoC noted that although the economy continued to operate in excess demand and that inflation was still uncomfortably high, there is growing evidence that economic activity is slowing and price pressures are subsiding.
- The deeply inverted yield curve tells us that the bond market expects the BoC has at most one more 25 bps hike left and that they will be cutting rates in the summer.
- With inflation still far above target, we believe the BoC will need to see a meaningful decline in inflation before they would be comfortable lowering rates.
- We expect long-term yields to be sensitive to any data that shifts the possibility of further hikes or the timing of rate cuts.