The Bank of Canada has likely put its rate-hiking campaign on pause and could conclude it's done enough to douse inflation. Read on via fpcomment
Advertisement 3For much of the past year, it has been fighting inflation that has been way above target, peaking at 8.1 per cent in June. The pace of rate hikes has been correspondingly remarkable. The challenge in this fight is always knowing when to stop. Monetary policy works with a lag, both when the bank lowers its policy rate and when it raises it. People don’t necessarily feel the effects of rate changes right away and predicting exactly when they will hit is difficult.
First, as it has been since July, the month after inflation peaked, the yield curve on Government of Canada debt is inverted: the return is higher on two-year than 10-year bonds. Inverted yield curves often portend slowdowns in economic growth. Markets tolerate low long-term interest rates only if they believe long-term inflation rates will also be low.Article content
Third, because monetary policy works with a lag it is always critical to look at leading indicators. The OECD has a “composite leading indicator index,” which combines a series of economic variables, including consumer confidence and business hiring, that best predict turning-points in the business cycle. Since May, the Canada index has been both below its long-term average and continuing to decline. That suggests a slump is coming.
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