Last week, the Bank of Canada announced – unsurprisingly – that it was keeping its policy rate unchanged. The next day, Deputy Governor Lawrence Schembri gave a speech titled “Canadian economy remains resilient even as global outlook worsens”. It was quite unusual for the Deputy Governor to give a speech so soon after a rate decision, so the market paid attention. At first, the standard observations were made: the Canadian economy was experiencing low unemployment, a solid housing market, had potential headwinds due to the tariff wars, etc.
But then came three interesting sentences: “The Bank of Canada will continue to conduct monetary policy appropriate to our own circumstances. We will continue to ground our decisions in our policy framework, setting interest rates to achieve our inflation target, mindful of the implications for financial vulnerabilities. Our current policy setting of 1.75 percent, which is 50 basis points below the US policy rate, continues to support the economy.”
This is telling us that the BoC will not follow other central banks just because they cut rates. It's reiterating that it will follow its own indicators before deciding and it will act only if those indicators are flashing red; and right now, those indicators are decidedly green. Since the market had priced in multiple rate cuts, a repricing was in order, and as a result, we now have one rate cut priced in. This is a strong signal that, in the BoC’s mind, economic fundamentals will have a greater weight on policy decisions than politics. As we know, this is an issue that Fed Chairman Jerome Powell has been struggling with for quite some time – he took considerable flak over the Fed’s last statement, which was significantly more hawkish than the market was hoping for, and which was much to the chagrin of President Trump. As we now wait for the Fed’s next week decision, we think that Mr. Powell can sleep well knowing that at least he has a friend in his neighbour to the north.
Vice President and Portfolio Manager
Active and Strategic Fixed Income Team
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