Words That Move Markets

When Bank of Canada (BoC) Governor Mark Carney speaks, the experts I read carefully parse his words, searching for subtle differences in his phrasing that may indicate a change in the BoC’s interest-rate outlook. This is a man whose words can literally move markets and last week when Governor Carney gave a speech in Vancouvertitled “Uncertainty and the Global Recovery”, they appeared to do just that.

Governor Carney has consistently warned Canadians that interest rates will rise faster than most of us are expecting and the BoC’s communications have contained language to that effect for some time. In July’s Monetary Policy Report, to cite a recent example, the BoC closed with the familiar phrase “some modest withdrawal of the present considerable monetary policy stimulus may become appropriate”.

But last Monday in Vancouver, instead of closing with these same words of caution, as has become his custom over the last several months, Governor Carney wrapped up his speech by saying “the Bank will take whatever action is appropriate to achieve the 2% CPI target over the medium term”. This is the same phrasing that the BoC used in the January MPR report when it was much less hawkish on the short-term future direction of interest rates.

That alone was noteworthy, but then, in his press conference after his speech, Governor Carney said that “monetary policy is very accommodative right now and is likely to remain so for some time”. That really got the market’s attention.

Speculation that the BoC would move off of its hawkish interest-rate position in its latest MPR (due out next week) was further bolstered by Statistics Canada’s release of its latest Consumer Price Index (CPI) for September on Friday. It showed overall inflation holding steady at 1.2%, well below the BoC’s 2.0% target.

So when the BoC issues its latest Monetary Policy Report (MPR) next week, will the final paragraph reiterate its tightening bias, as in the recent past, or will the Bank shift to a more neutral stance?

The data would certainly support a change in the BoC’s view. In the April MPR the BoC forecasted a GDP growth rate of 2.5% and inflation in the 2.0% range but since then, growth has been under 2.0% and inflation has remained well below target.

Of course, many market watchers have long believed that Governor Carney’s hawkish interest-rate warnings were only  a bluff designed to persuade Canadians to borrow less – a way to use his words, instead of his less ideally suited monetary-policy tools, to slow the rate of growth in household debt. If the BoC takes a more neutral position on interest rates, this may also be because it is now less concerned about the rate at which household debt levels are rising.

While BoC policy meetings and announcements haven’t held much mystery lately, I will be very interested to read the finely tuned language in the last paragraph on the next MPR report when it is released this Wednesday. Stay tuned.

Five-year Government of Canada (GoC) bond yields were flat last week, despite lots of volatility. My best one-year fixed rate was pushed up a little (to 2.69%) while five-year fixed rates held firm in the 3.00% range.

Variable-rate discounts are still available at prime minus 0.40% (which works out to 2.60% using today’s prime rate). If the BoC does change its view on the future direction of interest rates, it may be time to ask if paying any premium for the stability of fixed rates is still worth it. If there is very little chance that rates will rise for the foreseeable future, paying any premium, even a small one, for the certainty of a fixed rate may no longer make sense. I’ll cover this topic in more detail in my next Quarterly Mortgage Market Update.

The bottom line: I continue to believe that interest rates will remain at ultra-low levels until the world looks a lot different than it does today. As such, I expect the BoC to shift its guidance to a more neutral position in next week’s MPR. If it doesn’t, I think it will be because the Bank is still worried about rising household debt levels and not because it thinks rates are likely headed higher any time soon.