BOC feels heat to cut rates: analysts
Inversion of Canada’s yield curve by the most in nearly two decades is threatening to coerce the Bank of Canada to cut interest rates rather than risk an economic downturn, portfolio managers said on Wednesday.
Curve inversion, when longterm yields dip below short-term ones, is seen by some investors as a harbinger of economic recession.
It may push Bank of Canada governor Stephen Poloz and senior deputy governor Carolyn Wilkins to slash rates.
It could also be a source of damage for the economy, reducing the incentive for banks to lend and the motivation for investors to take on the long-term projects that tend to boost growth.
“The Bank of Canada can’t ignore what’s happening in debt markets and the inversion of the yield curve,” said Sal Guatieri, a senior economist at BMO Capital Markets.
A reduction in policy rates would at least provide some semblance of normality.
“It’s so highly inverted now, a reduction in policy rates would at least provide some semblance of normality.”
Canada’s yield curve inversion came as the yield on the U.S. 10-year Treasury note tipped 2.1 basis points below two-year Treasury yields Wednesday, spooking global markets.
The Bank of Canada left overnight borrowing costs on hold at 1.75 per cent in July and said it was comfortable with that stance given the domestic economy’s recovery from a series of challenges. But Canadian long-term rates have since fallen further below short-term rates. On Wednesday, the 10-year yield traded at about 20 basis points below the two-year yield, its deepest inversion since May 2000.
The last two inversions of twoand 10-year rates, in 2000 and 2007, preceded sharp easing cycles.
“I think the BOC will be watching this nervously,” said James Athey, a senior investment manager at Aberdeen Standard Investments in London. “It’s very much a global phenomenon but the signs coming from markets, including inversion, are concerning.”