Carney Rate Decision Divides Market the Most in 17 Months: Canada Credit
Bank of Canada Governor Mark Carney has investors and analysts divided by the most in 17 months on whether the central bank will raise interest rates at tomorrow’s policy meeting.
One-month overnight index swaps indicate that 65 percent of investors expect policy makers to raise the benchmark lending rate, according to data compiled by Bloomberg. That’s the lowest amount since April 2009, just before Carney introduced a conditional commitment to hold rates through June of this year.
Twelve of the 17 economists surveyed by Bloomberg News expect Carney to raise borrowing costs a quarter point to 1 percent, while the rest say he’ll stand pat. It’s the biggest split since April 2009. For the June 1 announcement, by comparison, all but two of 27 economists said he would raise rates, and all 20 surveyed in July predicted an increase.
“For the last two weeks, the market has been almost perfectly split in its expectations,” said Mohammed Ahmed, a rates strategist at Canadian Imperial Bank of Commerce in Toronto. “There’s this general consensus that the bank will be forced to the sidelines at some point in the cycle, and that’s what’s resulting in a lot of uncertainty and volatility.”
Canada’s economy is recovering from the recession faster than its U.S. counterpart, having already returned to its pre- recession employment level, and Carney has said the bank’s current 0.75 percent rate still provides “considerable monetary stimulus.”
‘Holding Up’
“The main reason to go would be that real rates are still negative and the Canadian economy, especially on the domestic front, is still showing signs of holding up relatively well,” said Doug Porter, deputy chief economist with Bank of Montreal’s BMO Capital Markets unit in Toronto. He predicts the central bank will raise rates tomorrow and then pause until next year.
Elsewhere in credit markets, the extra yield investors demand to own Canadian corporate bonds rather than federal debt narrowed to 148 basis points on Sept. 3, from 149 basis points the day before, according to a Bank of America Merrill Lynch index. Spreads have been as wide as 154 basis points and as narrow as 114 basis points this year. Yields rose to 3.8 percent on Sept. 3, from 3.72 percent the day before.
The securities have returned 7.02 percent this year, including reinvested interest, lagging behind the 7.06 percent gain for the broader index.
Spreads on provincial and municipal bonds were unchanged at 59 basis points on Sept. 3, according to a separate Merrill Lynch index. The yield on the bonds, which have returned 7.05 percent this year, ended Sept. 3 at 3.08 percent.
Slowing Growth
The Canadian economy, after growing at an annualized 5.8 percent in the first quarter, slowed more than expected to 2 percent -- a full percentage point below the central bank’s July prediction. As well, employers shed workers in July for the first time this year and inflation, as measured by the bank’s preferred core rate, slowed to 1.6 percent in July, Statistics Canada reported in August.
Carney’s rate decision is “a closer call, especially since we did have the Fed slightly change tack in August and, perhaps more importantly, the Canadian data have started to show some cracks as well,” Porter said.
The gap between the central bank’s policy rate and the one- month overnight index swap rate rose 5 basis points to 0.17 percent on Sept. 3. The spread , which tends to widen as traders increase wagers on higher interest rates, stood at 0.25 percent two days before the July decision and 0.18 percent before the June 1 announcement. The swap rate measures what investors predict the bank’s policy rate will average over that period.
Not Pre-Ordained
U.S. Federal Reserve officials said on Aug. 10 they will maintain their holdings of securities to prevent money from being drained out of the financial system in their first attempt to bolster the economy in more than a year. The Fed also retained a commitment to keep its benchmark interest rate close to zero for an “extended period.”
While the Canadian bank’s outlook includes a “a gradual reduction in monetary stimulus,” futures rate decisions aren’t “pre-ordained,” as there are elevated risks around the projections, Carney said on July 22.
“An issue is how far ahead of the Fed the Bank can run,” said Derek Holt, an economist at Bank of Nova Scotia’s Scotia Capital unit in Toronto who predicts the central bank will raise one more time before pausing for the remainder of the year. “The Bank has probably the best case in its history of parting company from the Fed,” because Carney hasn’t had the same problems as the Fed in getting interest rates to boost growth.
Tomorrow’s policy statement “will be much the same as the past couple of statements in terms of a relatively neutral bias that keeps markets guessing right up until the very next one in October,” Holt said.
To contact the reporter on this story: Alexandre Deslongchamps in Ottawa at adeslongcham@bloomberg.net.
Rate These Stories
Rate this Page