Credit markets now pricing in at least one 25 basis point cut by the end of this year
by a quarter of a percentage point, while providing some significant forward guidance, saying it expects to hold off further rate hikes. That makes it the first major central bankThe Canadian dollar and domestic bond yields fell on the news, as overall the bank’s actions were seen as a bit more dovish than expected. Meanwhile, bets in the credit market are now showing confidence that at least one 25 basis point cut will be on the way by the end of this year.
We’d been hopeful that the Bank would opt for the prudent approach and remain sidelined but in the end, a 25 bp hike was deemed to be the appropriate course of action by the Governing Council. Just as we’d noted in December, we believe the tightening to date is sufficient to bring inflation to target this year and thus, no further rate increases are needed in our view. With policy undoubtedly in restrictive territory, the Bank appears to agree.
The BoC’s first meeting of 2023 looks to be the last in which it will raise its policy rate. Heading into today, the Bank had communicated that it could go either way with today’s decision - deciding between a final hike or a pause. Given the robustness of consumer spending and employment trends, the BoC clearly felt it needed this final hike to solidify the turn in economic momentum.
Looking at the Bank’s forecast, the economy is set for a consumer led slowdown, with GDP likely to “stall through the middle of 2023.” Greater conviction in this has also led the BoC to cut its inflation forecast. With the belief that the economy is on the path to price stability, the BoC can now step to the sidelines and let its restrictive policy filter through the economy.
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