Markets have reacted to the latest Bank of Canada interest rate decision and outlook by increasing their bets that the central bank will start cutting interest rates in the second half of next year.
The Bank of Canada held its key overnight rate at 5.0% as expected and forecast weak growth, while leaving the door open to more rate hikes to tame inflation that could stay above target for another two years. Overall, markets took it as a dovish outlook. The Canadian dollar immediately weakened by about two-tenths of a U.S. cent, to 72.42 cents US, a seven-month low. The two-year Canada bond yield, which is sensitive to changes in central bank policy, moved lower, but was still higher on the day. At last check, it was up 6 basis points, after earlier being up by 10 basis points under the influence of rising U.S. Treasury yields.
Meanwhile, implied interest rate probabilities in swaps markets have now priced in greater than 50% odds that the Bank of Canada will start cutting interest rates by the end of next year. The following table details how money markets are pricing in further moves in the Bank of Canada overnight rate, according to Refinitiv Eikon data as of 1015 am ET. The current Bank of Canada overnight rate is 5%. While the bank moves in quarter point increments, credit market implied rates fluctuate more fluidly and are constantly changing. Columns to the right are percentage probabilities of future rate moves.