Money markets currently price in less than 50% odds of another cut this summer
The Canadian dollar and short-term bond yields immediately tumbled as the Bank of Canada announced its 25-basis-point cut. The loonie lost about two-10ths of a US cent, trading at 72.95 US cents as of 9:48 am ET. The two-year Canada bond yield, which is particularly sensitive to central bank moves, lost about four basis points and is now retesting support at 4 per cent. Its spread widened against the U.S. two-year bond, which was only down about one basis point to 4.76 per cent.
Money markets were pricing in close to 80 per cent odds this morning that the bank would cut at today’s meeting, so such a move was not fully priced into markets. It’s taken only eleven months for the central bank to go from hikes to cuts, but this cycle is very different. As expected, the Bank of Canada will continue to operate its quantitative tightening program in the background. In that way, central bankers continue to tighten financial conditions by increasing the supply of bonds held by the private sector, even as they worked to ease conditions via today’s rate reduction. The two policies will operate differently, but it does suggest that today’s rate cut won’t have as much impact on broad financial conditions as it might have otherwise.
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