Another upside surprise spurs further repricing of the Fed Once again, inflation data has provided an upside surprise, with the […]
BOC hints that today’s 50bps hike may well be its last move for the time being
Ahead of today’s (December 7) announcement1 from the Bank of Canada, markets were tossing a coin on whether the central bank would hike policy rates by 25 basis points or 50. The final decision was comparatively hawkish and saw the overnight rate target increase by 50bps to 4.25% and quantitative tightening policy continue on its previous course. This was tempered with a fairly dovish statement that hinted today’s move might be the last for the foreseeable future.
Market reaction has been relatively muted, reflecting a mark-to-market of the somewhat larger-than-expected hike (CAD mildly firmer, Government of Canada bond yields reversed earlier decline and are now higher by ~2bps across the curve).
Bank of Canada overnight rate target
Source: Guardian Capital based on data from Bloomberg and the Bank of Canada to December 7, 2022; shaded regions represent periods of US recession
While the statement accompanying today’s decision (provided below) indicates that global and domestic growth has proven to be stronger than anticipated in the Bank’s October forecast2 and inflation remains elevated (though with nascent signs that “price pressures may be losing momentum”), policymakers find “there is growing evidence that tighter monetary policy is restraining domestic demand.” Going forward, the Governing Council will consider “whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target.”
This guidance marks a distinct shift from prior meetings, where it was explicitly stated that the Bank of Canada’s decision-makers “expects that the policy interest rate will need to rise further.” Instead, it offers a clear hint that today’s hike, the seventh consecutive increase in the overnight rate that brings the year’s total cumulative rise to 400bps, may be the final move in this tightening cycle.
Of course, there are conditions. Namely, future rate increases will be dependent on:
1) “Assessments of how tighter monetary policy is working to slow demand”;
2) “How supply challenges are resolving”; and,
3) “How inflation and inflation expectations are responding.”
In other words, if the data co-operates and shows that excess demand ebbs, either due to a stronger supply-side, weaker demand or a combination of both, and price pressures continue to decrease, the Bank will be contented to move to the sidelines. But, if not, there is a scope for further hikes.
As it stands after the meeting, markets are hedging their bets on either direction as overnight index swap (OIS) pricing is roughly 50/50 on another 25bps worth of hikes at the next meeting (January 25, 2023) and generally holding at that level through next year. Expect a bit of rate volatility over the next month and a half as markets weigh each incoming piece of domestic (and global) macro data.
Overnight index swap (OIS) implied Bank of Canada overnight rate target
Source: Guardian Capital based on data from Bloomberg as at December 7, 2022
Written by: David Onyett-Jeffries
David Onyett-Jeffries is Vice President, Economics & Multi Asset Solutions, at Guardian Capital LP (GCLP) and provides macro-economic guidance to GCLP and its affiliates—Alta Capital Management LLC and GuardCap Asset Management Limited.
Bank of Canada increases policy interest rate by 50 basis points, continues quantitative tightening
FOR IMMEDIATE RELEASE
December 7, 2022
The Bank of Canada today increased its target for the overnight rate to 4¼%, with the Bank Rate at 4½% and the deposit rate at 4¼%. The Bank is also continuing its policy of quantitative tightening.
Inflation around the world remains high and broadly based. Global economic growth is slowing, although it is proving more resilient than was expected at the time of the October Monetary Policy Report (MPR). In the United States, the economy is weakening but consumption continues to be solid and the labour market remains overheated. The gradual easing of global supply bottlenecks continues, although further progress could be disrupted by geopolitical events.
In Canada, GDP growth in the third quarter was stronger than expected, and the economy continued to operate in excess demand. Canada’s labour market remains tight, with unemployment near historic lows. While commodity exports have been strong, there is growing evidence that tighter monetary policy is restraining domestic demand: consumption moderated in the third quarter, and housing market activity continues to decline. Overall, the data since the October MPR support the Bank’s outlook that growth will essentially stall through the end of this year and the first half of next year.
CPI inflation remained at 6.9% in October, with many of the goods and services Canadians regularly buy showing large price increases. Measures of core inflation remain around 5%. Three-month rates of change in core inflation have come down, an early indicator that price pressures may be losing momentum. However, inflation is still too high and short-term inflation expectations remain elevated. The longer that consumers and businesses expect inflation to be above the target, the greater the risk that elevated inflation becomes entrenched.
Looking ahead, 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. Governing Council continues to assess how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding. Quantitative tightening is complementing increases in the policy rate. We are resolute in our commitment to achieving the 2% inflation target and restoring price stability for Canadians.
1. Bank of Canada, Bank of Canada increases policy interest rate by 50 basis points, continues quantitative tightening, Press Release issued on December 7, 2022, https://www.bankofcanada.ca/2022/12/fad-press-release-2022-12-07/
2. Bank of Canada, Monetary Policy Report, October 2022, Report of the Governing Council, October 26, 2022, https://www.bankofcanada.ca/wp-content/uploads/2022/10/mpr-2022-10-26.pdf
This commentary is for informational purposes only and does not constitute investment, financial, legal, accounting, tax advice or a recommendation to buy, sell or hold a security. It shall under no circumstances be considered an offer or solicitation to deal in any product or security mentioned herein. It is only intended for the audience to whom it has been distributed and may not be reproduced or redistributed without the consent of Guardian Capital LP. This information is not intended for distribution into any jurisdiction where such distribution is restricted by law or regulation.
The opinions expressed are as of the date of publication and are subject to change without notice. Assumptions, opinions and estimates are provided for illustrative purposes only and are subject to significant limitations. Reliance upon this information is at the sole discretion of the reader. This document includes information concerning financial markets that was developed at a particular point in time. This information is subject to change at any time, without notice, and without update. This commentary may also include forward looking statements concerning anticipated results, circumstances, and expectations regarding future events. Forward-looking statements require assumptions to be made and are, therefore, subject to inherent risks and uncertainties. There is significant risk that predictions and other forward-looking statements will not prove to be accurate. Investing involves risk. Equity markets are volatile and will increase and decrease in response to economic, political, regulatory and other developments. Investments in foreign securities involve certain risks that differ from the risks of investing in domestic securities. Adverse political, economic, social or other conditions in a foreign country may make the stocks of that country difficult or impossible to sell. It is more difficult to obtain reliable information about some foreign securities. The costs of investing in some foreign markets may be higher than investing in domestic markets. Investments in foreign securities also are subject to currency fluctuations. The risks and potential rewards are usually greater for small companies and companies located in emerging markets. Bond markets and fixed-income securities are sensitive to interest rate movements. Inflation, credit and default risks are all associated with fixed income securities. Diversification may not protect against market risk and loss of principal may result. Index returns are for information purposes only and do not represent actual strategy or fund performance. Index performance returns do not reflect the impact of management fees, transaction costs or expenses. Certain information contained in this document has been obtained from external parties which we believe to be reliable, however we cannot guarantee its accuracy.
Guardian Capital LP manages portfolios for defined benefit and defined contribution pension plans, insurance companies, foundations, endowments and investment funds. Guardian Capital LP is wholly owned subsidiary of Guardian Capital Group Limited, a publicly traded firm listed on the Toronto Stock Exchange. For further information on Guardian Capital LP, please visit www.guardiancapital.com. Guardian, Guardian Capital and the Guardian gryphin design are trademarks of Guardian Capital Group Limited, registered in Canada.