The Bank Of Canada Lives In A World Of Denial

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The most recent Fed decision unmistakably signaled that rate cuts are clearly planned for 2024, putting all central bankers on notice it is time to switch gears. Judging from the Fed’s dot plan forecasts, its members anticipate three rate cuts in 2024, four cuts in 2025, and three in 2026. The 3 cuts in 2024 amount to a 0.75% drop in the Fed funds rate. However, many bond market participants expect rate cuts to add up to a 1.5 % drop in 2024.Global bond markets reacted instantly. The benchmark 10-year US Treasury yield, a barometer for long term rates, fell below 4 percent for the first time since August. The policy-sensitive two-year yield slipped to its lowest point since May. The dramatic fall in yields reversed the thinking over the past couple of months which maintained that rates would remain “higher for longer”. The Fed put that slogan to rest.Shortly after the Fed’s announcement, the ECB and the Bank of England both held their rates steady but did not tip their hats in the direction of imminent rate cuts. Nonetheless, investors know that the Fed sets the narrative for central banks worldwide. These European bankers noted that inflation rates were coming down at a very encouraging pace. The head of the ECB, Christine Lagarde, did not rule out rate cuts total 1.5% in 2024. Consequently, European bond markets have also undergone a dramatic drop in yields. This brings us to the rather strange position adopted by the Governor of the Bank of Canada, Tiff Macklem when he says:

“We have not started having that discussion (about cutting rates) because it’s too early to have that discussion. We’re still discussing whether we raised interest rates enough and how long they need to stay where they are.”

The Bank goes even further in arguing that it is still prepared to raise rates should the need arise. The Governor made it clear that Canadians’ rates were not coming down any time soon, putting it on a divergent path from the U.S. Federal Reserve. How realistic is the Bank of Canada’s ability to maintain rates at these levels while the US indicates it will reverse course? 

Canadian economists are, by and large, not buying the Bank’s protest against cutting rates. Two prominent economists, Ben Tal of the CIBC and David Rosenberg, make a convincing case that the Bank of Canada will likely cut rates by as much as 1.5% in response to negative growth and lower inflation rates.More By This Author:The Mortgage Market Is Contributing To The Decline Of The Canadian Economy Canadian Banks Signal Trouble Lies Just Around The Corner The Bank Of Canada Is Finished Raising Rates Now For When To Consider Cutting Rates


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