There's an 'open risk' of another increase, according to the banking giant
The Canadian labour market’s latest performance, which saw the addition of 41,000 jobs in April, essentially invalidates the possibility of any rate cuts by the Bank of Canada in the near term, according to CIBC Capital Markets.
“Indeed, another rate hike in Canada is still an open risk, although we see enough of a deceleration in inflation to give the Bank of Canada license to wait and see,” said Avery Shenfeld, managing director and chief economist at CIBC Capital Markets.
Any movements at this juncture will have significant implications on the future market environment, the analyst said.
“If what comes next is just a long pause through 2023, markets will remain [convinced] that next year will bring a substantial policy ease,” Shenfeld said. “But a fairly deep slide in policy rates is needed for 10-year rates to rally a lot from here, or for a variable rate mortgage to be the right pick in early 2024.”
At the same time, certain pressures that could force the rate to veer closer to neutral in the years ahead are likely to persist, he said.
“The prior cycle benefited from a steady diet of cheap goods prices, allowing central banks to let the service sector run hotter,” Shenfeld said. “That might not be as achievable if trade barriers and the costs of energy transition keep goods inflation on a somewhat firmer trend, although there is a lot of government subsidization helping on the cost side of both green energy and industries being induced to produce closer to home.”
CIBC noted that an eventual upward-trending yield curve might require 10-year bonds to hover near the 3% level, should the neutral rate “actually [become] the central tendency for the next decade’s overnight rate.”
“We’ll probably see a sharper rally when overnight rates do finally start to ease, as bond markets are prone to overshooting,” Shenfeld said. “But if neutral is the norm for overnight rates, that won’t be sustainable.”