Economist says Bank of Canada 'wasn't convincingly hawkish enough'
The Bank of Canada may benefit from taking a more assertive stance when it comes to their rate cuts, according to Derek Holt, Scotiabank’s vice president and head of capital markets economics.
The central bank has held the overnight rate at 5% and left QT and the balance sheet unwinding plan intact, a decision which was fully expected. However, it leaned against market pricing for early rate cuts which left a hawkish tone.
“The Bank of Canada was hawkish mainly by using patient language toward timing rate cuts,” said Holt.
“It just wasn’t convincingly hawkish enough to markets that, left to their own devices, are on the path toward reigniting housing imbalances, tamping down how monetary policy works through mortgage resets, inflaming further government spending and driving concomitant inflationary pressures,” he added.
In response to the Bank’s move, markets retained their unchanged cut pricing. Market pricing for rate cuts was unaffected. The two-year yield was flat to pre-statement levels and flat on the day. The 5-year GOC yield was at its lowest since the booming housing market last May 18. The Canada 10-year yield was also at its lowest since late June.
“The BoC and markets are combining efforts to ignite another booming housing market, renewed macroeconomic imbalances, lessened efficacy of monetary policy working through mortgage resets, emboldening governments to spend more, and triggering spillover effects upon broader inflation,” said Holt.
Deputy governor Toni Gravells is set to deliver the Economic Progress Report and Holt said that the public guidance he will give will be important.
“If Gravelle doesn’t seize that brass ring, well, maybe today’s market actions around the BoC will be a lessen to the more powerful central banks that are on tap to make decisions next week,” said Holt.
