The Bank of Canada held the line today and left the country’s pace-setting overnight rate at 1%.

The news, however, is not what the BoC did, but what it hinted at doing.

Governor Mark Carney and co. jostled expectations in their prepared statement, which said:

• “Overall, economic momentum in Canada is slightly firmer than the Bank had expected in January.”
• “…The economy is now expected to return to full capacity in the first half of 2013.”
• “…The profile for inflation is expected to be somewhat firmer than anticipated.”
• “Europe is expected to emerge slowly from recession in the second half of 2012”
• “In light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate.”

This last point, in particular, has put the bond market on edge. As of this writing, 5-year yields are up seven basis points since this news broke, and up 10 bps on the day. (Bond yields lead fixed mortgage rates.)

Prior to this morning’s announcement, the market expected the Bank of Canada to move rates in early 2013. We could now start seeing some economists shift rate hike predictions to Q4 of this year. BMO has already moved up its forecast by six months to year-end 2012, according to BNN.

The BoC will still want to see more data before pulling the trigger, however. Canada remains tightly constrained by cautious U.S. growth, and that growth has had a funny habit of disappointing after optimistic spurts in the spring.

We also have the same contingent of Eurozone countries still battling ongoing solvency fears.

Pending the next few months of domestic data, the storylines in the U.S. and Europe have the potential to continue weighing down Canadian rates.

For now, today’s BoC decision to leave the overnight rate at 1% means that prime rate should remain at 3.00%.

The next Bank of Canada rate meeting is June 5.

---

Rob McLister, CMT