The Bank of Canada on Wednesday cut its key policy rate by 25 basis points
to 4.25% as expected, while expressing concern that weaker-than-anticipated growth might mean inflation falls too quickly.
The move was well telegraphed ahead of time, and the market reaction reflected that. The Canadian dollar barely budged and stayed within its range so far today of between 73.73 cents US and 73.90 cents. Canada’s two-year bond yield was down about 3 basis points so far today at 3.222% - about where it was prior to the 945 am ET decision and in line with the move in the equivalent U.S. Treasury.
The next BoC meeting is on Oct. 23, and implied interest rate probabilities in swaps markets now suggest about a 92% chance of another quarter point cut at that time – and 8% odds of no move. Markets continue to price in very strong odds of a further quarter point cut at the following meeting too on Dec. 24.
By next April, money markets suggest the Bank of Canada overnight rate will sit at 3.25% - a full percentage point below where it now resides today. However, markets are placing very little odds that the bank will step in with a larger 50 basis point cut at any of its future meetings. Here’s how implied probabilities of future interest rate moves stand in swaps markets, according to data from LSEG as of 1013 am ET. The overnight rate now resides at 4.25%. While the bank moves in quarter point increments, credit market implied rates fluctuate more fluidly and are constantly changing. Columns to the right are percentage probabilities of future rate moves.
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