Press Pause

Rate hikes from developed market central banks continued on Wednesday.

Admittedly, we might’ve passed the threshold beyond which incremental hikes from people not called Jerome Powell, Christine Lagarde or Andrew Bailey aren’t particularly relevant for the broader macro outlook, but in my view, each move still counts as newsworthy.

Given the coordinated nature of the developed market tightening campaign, we can ostensibly divine something from each decision about the likely trajectory of the rate path across advanced economies going forward. Not that Powell (for example) is beholden to Tiff Macklem, but we’re still in an environment where ignoring “lesser” central banks risks missing nuance that might be relevant for the Big 3.

Macklem on Wednesday delivered a second consecutive 50bps hike, but with (another) dovish slant. The move brought the cumulative tightening from the BoC this year to 400bps (figure below).

That’s quite a lot of tightening, but it’s worth noting that October’s half-point move counted as a dovish surprise, particularly coming from the BoC, which tried hard to demonstrate its resolve with a 100bps broadside over the summer and a follow-up 75bps move in September.

Recall that Macklem is under tremendous pressure in Canada from both sides of the political spectrum. That’s a key storyline. I won’t recapitulate given what I think it’s fair to call limited interest in Canadian politics, but those who need a refresher can peruse my account of the bank’s last hike here.

Wednesday’s move might’ve marked the end of the hiking cycle up north. At the least, the statement language suggested a pause is possible despite resilient domestic demand and a tight labor market. “Looking ahead, Governing Council will be considering whether the policy rate needs to rise further to bring supply and demand back into balance and return inflation to target,” the statement said, after noting that the bank still expects growth to “essentially stall” over the next six months.

Home prices in Canada are down 10% from the highs seen in February, but at almost $570,000 (that’s US dollars), the typical home isn’t exactly cheap. Some suggest sales are on the verge of picking back up again after transactions fell for six straight months, while others contend prices need to adjust more before any kind of balance with rates is restored. At the country’s six largest lenders, the value of domestic mortgages rose just 1.6% QoQ in FYQ4, the slowest pace since the onset of the pandemic.

The nod to a potential pause in Wednesday’s BoC statement was, I imagine, a compromise. The market was split on whether today’s hike would be 25bps or 50bps, so opting for the latter opened the door to the pause hint. “A dovish shift suggests further hikes are no longer the default position,” ING remarked.

The BoC decision came a day after the RBA hiked rates for an eighth meeting. Although the bank suggested more hikes are coming for Australia, Philip Lowe downshifted to 25bps increments months ago, and on Tuesday emphasized the lagged effects of tightening, particularly on the domestic housing market. Policy isn’t on a pre-set course, Lowe said.

That brings us full circle. For Fed watchers, the read-through from this week’s RBA and BoC decisions is just that following the December FOMC meeting, the door is open to “regular”-sized hikes and, eventually, a pause. Of course, that doesn’t tell you anything you didn’t already know.


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