Image Source: Pixabay

To no one’s surprise, the Bank of Canada announced today that it held its overnight rate at 4.5%, citing that the universe is unfolding as it expects. Namely, the Canadian economy is slowing in response to significant inventory adjustments as the extraordinary effects of the pandemic continue to unwind and supply constraints greatly ease. In addition, the Bank is taking credit that its restrictive monetary stance is taking hold on household and business spending decisions in conjunction with a global slowdown. 

Canadian bond investors never bought into the scenario that inflation needed to be attacked by a swift and dramatic increases in the policy rate. This was the strategy that the Bank, along with the Federal Reserve, adopted over the past year. Bond investors were more attuned to the temporary nature of the surge in energy and food prices, driven mostly by international disruptions starting with the COVID pandemic in 2020 and further exacerbated by the Russian invasion of Ukraine. The former no longer has any meaningful impact on growth and, in the case of the latter, world energy and food prices are no longer threatening to add to inflation. Even the Bank concedes that “ with economic growth for the next couple of quarters, pressures in the product and labor markets are expected to ease. This should moderate wage growth and also increase competitive pressures, making it more difficult for businesses to pass on higher costs to consumers”

 Now, as inflation is waning and the prospects for a more serious slowdown build, the yield curve inversion is the largest in recent memory. The 10-2yr spread stands at 105bps and 30-2yr at 120 bps.

Source: http://www.worldgovernmentbonds.com/country/canada/Mar 8,2023

To borrow a phrase from a Coca-Cola slogan from decades ago, could this be the “pause that refreshes”? At any rate, the Bank maintains that inflation will come down to 3%, mid-year, on its way to returning to the 2% target. Today’s decision to hold the line on rates is more telling in that occurs just a day after the Federal Reserve Chairman Powell took a very hawkish position in his Congressional testimony, threatening another 50 bp jump next month. The Bank of Canada seems to want to march to its own drummer, mainly because domestic economic conditions do not warrant further restrictions. It is not unreasonable to conclude that the Bank of Canada is done with rate hikes for the balance of 2023.

More By This Author:

Does The Bank Of Canada Protest Too Much About An Overheated Economy?
North American Bond Markets Flag A Recession As Central Bankers Continue To Raise Rates
Central Bankers Have Yet To Recognize That Inflation Is Past Its Peak