BOC: Easing bias before a rate cut

Nice table here from Pension Partners (via @MktOutperform )

The Race to Negative Yields (%)

And here is the Canada 10 year Government Bond (from Trading Economics)

Canada10 Year Bond (2009-2015 YTD)

On January 21, 2014 I argued that the Bank of Canada’s policy rate would continue to flat-line for the year despite market optimism to the contrary. I also disclosed that I had added long bond exposure to my personal portfolio with the view that 2014 would be a bounce back year for sovereign long bonds, specifically Canadian. Little has changed to deter the portfolio choice as the global landscape worsens.

At home, in an era of what I believe are low rates for a very long time, financial repression is killing the spending capacity of retirees. A not so small point is that the front end of Canada’s baby boom generation began retiring last year. That is a trickle; a flood of retirees will follow. Central banks are relying on reduced interest rates to spark credit creation (and in turn a greater stock of private debt) to spark consumption. The price of real estate remains at a high in nominal terms in major cities like Toronto and Vancouver and household debt to income ratios remain high as well. To keep the not so virtuous cycle of consumption going will require the central bank to more encourage credit creation and asset price inflation to spur the industry that is growing –real estate development– however with the federal government attempting to balance its budget the output gap that the BOC calculates as a guide (but necessarily a final decision making metric for policy) is likely to expand rather than contract. With slack only increasing and knock on effects from oil’s price decline yet to be felt in the numbers that drive markets, 2015 will be another year of easy monetary policy. Absent increases in real wages of working and middle class workers there will be no spike in effective demand within the Canadian economy that will be sustainable. If anything, the case is now being made by Ted Carmichael and others for a policy rate cut. I agree with this view. While a rate cut on January 21 is unlikely the language leaning toward an easing bias may occur in the coming months. Reading the tea leaves of monetary policy statements is more art than science. If the BOC’s dovish language is enough then it will stand pat as long as it can but as the data flow increases and core inflation falls we will see a rate cut this year.

The scheduled announcement dates for BOC policy rates in 2015 are:

Wednesday 21 January
Wednesday 4 March
Wednesday 15 April
Wednesday 27 May
Wednesday 15 July
Wednesday 9 September
Wednesday 21 October
Wednesday 2 December

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