The Bank of Canada chose to leave its trend-setting overnight lending rate at 0.5% in its July announcement – a sign that post-Brexit turbulence is receding. Dr. Ian Lee, associate professor at Carleton University’s Sprott School of business and former economic advisor to the government, says BoC Governor Stephen Poloz is clearly confident in the resilience of home-grown banks and businesses.
“I think that it shows that the fear of the apocalyptic meltdown from Brexit is receding by many in private markets and capital markets as well as central bankers,” he says.
He added that despite some speculation a rate cut could have been in the cards, the BoC is loath to further stoke ultra-hot housing markets with further interest rate discounts.
“On one hand you’ve got decreasing concern over the consequences of Brexit and increasing concern over the real estate markets in Vancouver and Toronto, and I think those two together ensured there would not be a rate reduction because that would be pouring gasoline on the fire for the real estate market,” he says.
Bond yields rose slightly on the BoC’s news, with five-year bonds at 0.596%, a mild increase from Tuesday’s 0.539%. Ten-year yields broke the 1% threshold at 1.058 after 0.981% the previous day.
Lee says that days may be numbered for plunging bond yields and other safe haven investments favoured by spooked investors, speculating global leaders will soon roll out soothing messaging for the markets.
“Ms. May was just sworn in (as UK prime minister) a few moments ago, and she seems a very prudent and responsible individual - I think she’s going to arrange a meeting as soon as possible with Chancellor Merkel to have a one and one,” he says, And after meeting President Merkel, and it’s in the interest of both countries to smooth the troubled waters, they’ll issue a calming statement to the market.”
He adds that a new trade agreement between the UK and U.S is also likely top of May’s list, using existing UN or CETA models as a platform. “That will make investors happy, and that will really calm down the bond market,” he says.
However, the BoC’s move to cut growth forecasts widens the gap between Canada’s monetary policy and that of the U.S., where the Federal Reserve has been mulling the possibility of a second rate hike this year.
“It certainly created the pressure for an increased divergence,” he says. I think it means that it is going to be quite some time before we see a rate increase in Canada; I think we’ll see one much sooner in the United States.”
Bank of Canada holds trend-setting rate at 0.5%
Bank of Canada’s Poloz unfazed by gloomy jobs data