The Bank of Canada’s October policy meeting may prove to more significant in hindsight, despite no change in interest rates. The firm promise by BOC Governor Tiff Macklem that “if you are a household considering making a major purchase if you’re a business considering investing, you can be confident that interest rates will be low for a long time,” has pushed out any expectation for any interest rate hikes for several years: through 2023.
To this end, interest rate expectations have evaporated due to the clear forward guidance offered by BOC Governor Macklem. Three months ago, in mid-August, there was a 17% chance of a 25-bps rate cut by December 2020. Now, there is a 0% chance for December 2020, an expectation that carries through September 2021.
For weeks, we’ve said that “it would appear that the Bank of Canada’s efforts along the interest rate front are finished…if the BOC does anything else, it may not be to cut interest rates to zero – or negative territory.” Accordingly, the decision to shift the composition of the BOC’s QE program towards long-term bonds to keep interest rates as low as possible without explicitly dropping the main overnight cash rate into negative territory.
RESERVE BANK OF AUSTRALIA LOOKS AT A RATE CUT:
The Reserve Bank of Australia’s November policy meeting produced a 15-bps rate cut as expected, but the more significant development was the shift in focus for policymakers. RBA Governor Philip Lowe said that “Labour markets are working differently than they used to and wage and inflation dynamics have changed…given this, we have now moved to place much more weight on actual outcomes, rather than forecast outcomes, in our decision making and our forward guidance.” In effect, this means there will be a greater focus on actual labor market outcomes (e.g. the unemployment rate) over expected price pressures.
According to Australia overnight index swaps, there is between a 22 to 25% chance of a rate cut through December 2021, which appears to be nothing more than a pricing quirk due to the RBA’s extraordinary efforts to institute yield curve control. The RBA will be keeping its overnight cash rate at 0.1% or lower for at least the next two and a half years.
AUD/CAD Short (Sell)
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