Carney Moves Rates

Mark-CarneyBank of Canada chief, Mark Carney, went out of his way to remind Canadians that the promise of low rates is “expressly conditional” on low inflation. And inflation has been stronger than expected.

Short-term interest rates rose after Carney’s statement, with traders placing bets that the Bank of Canada will hike rates in June or July.

Among the rates that moved:

  • Banker’s acceptance yields (which drives variable mortgage rates) hit a new 10-month high.
  • 1-year bond rates, are at a 13-month high.
  • Bloomberg says Canada’s 6-month overnight index swap rate, a gauge of what the overnight rate will average over that period, is at a 1-year high.

Also up is the 5-year bond yield, which influences fixed mortgage rates. It made a new 5-month high yesterday.

Check out how fast the tone has changed in the analyst community:

  • "It increasingly seems as though the Bank of Canada is very tempted toward a June hike." – Eric Lascelles, chief rates strategist at TD Securities. (Edmonton Journal)
  • “I cannot imagine a lower inflation forecast being unveiled come April, but can easily see a higher and sooner forecast.” – Derek Holt, economist at Scotia Capital. Holt thinks Carney may raise rates in June—possibly even April. (BusinessWeek)
  • "We still look for a first move in July, but the odds of something happening earlier are increasing a bit." – Michael Gregory, senior economist at BMO Capital Markets. (Ottawa Citizen)

Just a few months ago, some economists were predicting rates wouldn’t rise until Q4 2010 or early 2011. It’s amazing what a string of hawkish economic reports will do to expectations.

  1. I was actually at the speech yesterday, and I didn’t get the sense that he was hinting at a rate hike in June.
    Towards the end of his speech, he stated that “The global economy has evolved largely as expected… Although the level of economic growth is now somewhat higher than projected, the outlook for inflation and economic growth in the global economy over the near term remains essentially unchanged…”
    He did note that the interest rate committment was “expressly conditional”, but it seems weird that he would reiterate the commitment if he was planting the seeds for an earlier rate hike.
    Just my $0.02.

  2. Al R, I think the BOC’s official position is that they will hike rates in June. He doesn’t need to hint about that. What people are more interested in is whether he will hike them before June.

  3. I believe the Bank’s “official” position is the expressly conditional commitment to stay on the sidelines until the end of 2010 Q2. So unless there is strong reason to drop the commitment, the earliest rate hike would be in July…

  4. here we go again, bond yields move to the upper end of their 1 year trading range (they’ve gone absolutely NOWHERE in a year now despite the rhetoric to the contrary) and everyone goes crazy about rate hikes coming. I still don’t see it. Look at the US housing market – its BRUTAL and deterioratring again. Much of the artificial stimulus is coming to an end and the double dip recession scenario is very much back on th table. If the US does dip again, Canada will follow suit. Now, tell me that the BoC will still entertain rate hike ideas in that environment? I don’t think so. Another couple of days of rallying on the 5 and 10yr bond yields and then we will likely start heading back down again. Look at the charts, its the same pattern over and over again for the past 12 months.

  5. Hi Al,
    Thanks for the notes. That is really cool that you were at the speech.
    I bet Mr. Carney would love to make it to the July 20 meeting with no hike. He’d look like a star by accurately timing a rate hike 1.25 years in advance!

  6. I was able to hear Don Drummond (TD), Jack Mintz (U of C), Chris Ragan (McGill/Dept of Fin), Peter Hall (EDC), Paul Booth (Industry Canada) and Carney over the course of half a day or so. Carney was definitely the highlight.
    Kind of heaven for me, sad as it is to say. :-)

  7. I know there are as many differences as similarities, but I was looking at rates in Australia. 5 year fixed rates are running at 7%+ currently. If such rates are possible there, why not here? It won’t happen in June, but I can see gradual but steady increases starting at that point.

  8. Al, wrt your comments about interest rate increases, I agree that it is unlikely that gov’ts will choose to willingly raise rates.
    However, in the market of supply/demand on bond pricing, I look at the increase in global sovereign debt (from $34 trillion to $50 trillion, 2007-2010), and with MUCH more to come….
    and I wonder….
    does this not make us increasingly prone to a buyers market for sovereign debt? (and by extension all other debt as well?)
    And in the face of higher financing costs on existing debt….YIKES…what happens to budgets of the governments of the world and their future annual deficits???
    Remember, that when we talk about the various gov’ts annual deficits…we aren’t just talking about the need to fund those, but also the various shorter term debt needing to be refinanced.
    Can anyone point to an authoritative source for Sovereign debt, split by duration of the bonds?
    Ultimately, what I am proposing is the possibility of zero inflation and high interest rates. I don’t think we have seen this before have we? Conceptually, there is nothing preventing it.
    I don’t have answers. I’m just speculating. Any more educated posts in response are welcomed.

  9. A graph which demonstrates that 80%+ of the recent increase in the US debt has been funded with a 1 yr maturity. (I can’t vouch for the graph, I don’t know who made it)
    An economist article on the sovereign debt “debt trap”. The optimists will be pleased to see Canada ranks very well on these tables.
    And from the Financial Times, where they talk about the avg maturities of the worlds sovereign debts
    “In most European countries, the average maturity of debt currently lies between five and nine years. In Greece, for example, it is almost eight years, while in Germany it is six years. Meanwhile, in the US, the number is actually below five years, leaving Washington staring at one of the biggest rollover challenges in the world.
    However, the UK is a stark outlier: the average maturity of the gilt market is currently 14 years, longer than almost anywhere else in the world.”
    All of this suggests to me that in addition to financing $2T+ annually of new sovereign debt over the next several years, we also face the rollover of $20T+ of exisiting debt over the next 5-9 years.
    The preceding paragraph does not reflect the rollover of existing corporate and other debts.
    The worlds global GDP is approx $60T+. Lets allow the global GDP a 5% annual increase – that produces $3T+ a year, of which a substantial portion is needed for the new sovereign debt.
    And we’re heading into the global baby boom draw down of savings over the next 10 years, which challenges the rollover of existing bonds.
    I’m just writing on the fly here – I have no answers. But it seems to me like high interest with zero inflation and growths is very possible. Then again, maybe e central bank gnomes have more tricks up their sleeves!

  10. TA, umm, maybe if there was a breakout (there isn’t) that might make some sense :) Check the charts – might help you.

  11. Chuck, hmmm, who’s speaking in hindsight? Certainly not me. Quite the opposite. Instead I am suggesting that yields are NOT going any higher here and are peaking around now, despite all the hype about soaring rates from the media and websites.

  12. Al you come on spouting about how right you are for predicting rates would stay low. That is the definition of hindsight. You know no more than anyone else where rates are going.

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