Bank Of Canada Preview: Market Positioning Offers Up Short-Term Opportunity


On Wednesday at 15:00 GMT, the Bank of Canada’s Governing Council is set to announce either a 25 or 50 basis point hike in an attempt to slow demand and bring inflation back towards its 2% target.

(Click on image to enlarge)


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A Case for a 50 Bps Hike:

During the October meeting, the message out of the governing council was that the Canadian economy continued to operate in excess demand, labor markets remained extremely tight and underlying price pressures had not yet shown any meaningful signs of abating.

The picture has not changed materially in the time that has passed since. Inflation sits at 6.9%, more than three times the Bank’s 2% target and, more worryingly, price pressures are broad-based with two thirds of CPI components increasing by more than 5%. The labor market has also gone from strength to strength despite having hiked rates by 3.5% since March. Last week’s employment data added 10k jobs on top of October’s massive 108k addition.

Relatively speaking, Canadian inflation could be a whole lot worse and has fared a lot better than the UK, US, and Eurozone.

CPI Inflation Among Selected Major Economies

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Source: Refinitiv, prepared by Richard Snow

A Case for 25 Bps Hike:

The Bank has also revised its growth forecasts lower to 3.3% for 2022 vs 3.5% in July, with further downward revisions being made for 2023 and 2024. Therefore, the Bank warned against the possibility of a technical recession any time from Q4 2022 to H2 2023.

In addition, sectors of the economy that are more sensitive to interest rates are showing signs of the effects of the accumulated rate hikes. Sellers have been putting off listing their homes on the market in hopes of a spring rebound in house prices, while first time buyers are finding it even harder to qualify and service mortgage repayments. The image below reveals the sharp decline in home sales, which has dropped below the 10-year average. Actual home prices, however, remain elevated but have cooled slightly.


Therefore, forward guidance out of the Bank of Canada will be key for the housing market. Members of the BoC have mentioned that we are nearing the end to the rate hiking cycle but it remains to be seen how high above 4% the rate will remain.

(Click on image to enlarge)


Source: Refinitiv, prepared by Richard Snow

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