Bank of Canada Hike: Surprised? You shouldn't be.

by Murray Gunn
Updated: July 13, 2017

Grabbing the headlines today is the Bank of Canada's first interest rate hike in seven years. Moving the benchmark lending rate up 25 basis points to 0.75%, Bank of Canada Governor Stephen Poloz cited a Canadian economy "approaching full capacity" as one of the reasons for the tightening in monetary policy. Speculation amongst conventional economists has now turned to whether they will continue to hike rates. We have a simple answer to that question: watch the market.

The Bank of Canada hike is just the latest example of a central bank adjusting its lending rate to reflect the collective will of the market, as reflected in free market pricing. Our chart below shows that the 2-year Government bond yield had already moved up 50 basis points from May before yesterday's central bank hike in rates. Indeed, the 10-year bond in particular is showing that a major move up in yield may have started in 2016. Also, the Canadian dollar trade-weighted-index had appreciated by over 6% from May before the hike, perhaps reflecting the market's view of tighter policy. The late, great Richard Russell used to say that a market is a massive "voting machine" with its raison d'être being to anticipate the future. This is why market prices generally move before "events".

If you want to know which way central banks will adjust monetary policy, don't listen to economists; listen to the market.

You can read Murray Gunn's regular commentary on fixed income, currencies, the economy and deflation in Global Market Perspective, Interest Rates Pro Service and Currency Pro Service.

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