Back to Blog

Bank of Canada puts rates on ice till April of 2011

General Angela Calla 15 Nov

The Bank of Canada will keep its policy rate unchanged until the second quarter as economic growth slows, according to a Bloomberg News survey that also showed bond-yield forecasts were cut for a fourth month.

The central bank didn’t raise rates Oct. 19 after three prior increases and won’t act again until the April-June period, compared with the earlier forecast of a first-quarter increase, the survey showed. Canada’s three-month treasury bill will yield 1 percent at year-end, down from 1.1 percent in last month’s survey, to match the Bank of Canada’s overnight target for loans between commercial lenders.

Governor Mark Carney, 45, has said there are limits to how far Canada can diverge from the U.S., where the Fed said on Nov. 3 it plans to buy an extra $600 billion of Treasuries to support the recovery. The so-called quantitative easing may not benefit Canada much because it’s pushing up the Canadian dollar and making goods more expensive abroad, said Paul Ferley, assistant chief economist at Royal Bank of Canada.

“To the extent the Bank of Canada shares that concern about slowing growth it’s a reason to delay hiking rates,” Toronto-based Ferley said.

The 10-year government bond yield will be 2.83 percent on Dec. 31, according to the median of 20 estimates gathered Nov. 4-11. The last survey called for a 3 percent yield by the end of the year. The 10-year bond yield was 3.02 percent on Friday.

“The longer and larger Fed QE becomes, the further the Bank of Canada probably extends its policy pause,” Michael Gregory, senior economist at Bank of Montreal in Toronto, wrote in a Nov. 12 note to clients. “Government of Canada bond yields should decrease in the wake of declining U.S. Treasury yields.”

Factory Decline

Investors are betting the Bank of Canada will keep interest rates unchanged until mid-2011. The rate on the six-month overnight index swap was 1.10 percent on Nov. 12, and the nine- month security’s was 1.17 percent. Investors are also betting 10-year bond yields will be 3.13 percent in December, according to futures contract trading on the Montreal Exchange Nov. 12.

Elsewhere in credit markets, the extra yield investors demand to hold the debt of Canada’s corporations rather than its federal government narrowed on Nov. 12 to 135 basis points, or 1.35 percentage points, from 138 the day before and 141 a week earlier, according to Bank of America Merrill Lynch data. That’s the narrowest so-called spread since May.

Relative yields on U.S. corporate bonds ended last week at 175 basis points, from 176 the week before, the Merrill data showed. Global corporate spreads were 167 basis points, two basis points wider than the previous week. Canadian corporate bonds have lost investors 0.6 percent this month, compared with declines of 0.1 percent for U.S. company debt and 0.2 percent for global corporates.

Provincial Bonds

In provincial bond markets, relative yields ended last week at 51 basis points, from 53 basis points the week before and matching the tightest spreads since April. Spreads have dropped from as wide as 71 basis points over federal benchmarks on May 21, when concern about debt levels in Europe was at a peak.

Provincial and municipal bonds have lost 1.3 percent this month, compared with a loss of 0.9 percent for U.S. municipals.

Canada will auction C$1.4 billion in 30-year bonds on Nov. 17. The 4 percent bonds will mature in June 2041. The previous auction of 30-year bonds, on Sept. 1, drew an average yield of 3.489 percent and a bid-to-cover ratio of 2.27.

30 Years

The benchmark 30-year yield rose 14 basis points last week, or 0.14 percentage points, to 3.63 percent. The price of the 5 percent security due in June 2037 dropped C$2.79 during the five days to C$123.30.

Canada’s 30-year bonds yielded 65 basis points below the equivalent maturity U.S. security, compared with an average of about 6 basis points over the last decade, according to Bloomberg data.

Gross domestic product grew at a 1.6 percent annualized pace in the third quarter, according to the median of 20 responses, less than the 2.1 percent estimate taken last month.

“It’s not just trade that has slowed,” said Avery Shenfeld, chief economist at CIBC World Markets in Toronto. “Domestic demand seems to have slowed, and the housing market, from a boom in the first half of the year.”

                    3Q      4Q      1Q      2Q     Avg.    Avg.
                   2010    2010    2010    2011    2010    2011

GDP annualized     1.6%    2.4%    2.5%    2.7%    3.0%    2.4%
 Previous survey   2.1%    2.5%    2.6%    2.4%    3.1%    2.5%
Jobless rate       8.0%    7.9%    7.9%    7.8%    8.1%    7.8%
 Previous survey   8.0%    7.9%    7.9%    7.8%    8.0%    7.7%
CPI YOY%           1.8%    2.0%    2.1%    2.1%    1.7%    1.9%
 Previous survey   1.9%    1.9%    1.9%    2.1%    1.7%    1.9%

                    3Q      4Q      1Q      2Q      3Q      4Q
                   2010    2010    2011    2011    2011    2011
Overnight Rate    1.00%   1.00%   1.00%   1.00%   1.50%   2.00%
 Previous survey  1.00%   1.00%   1.00%   1.50%   1.75%   2.00%
Three-month bill  1.25%   1.00%   1.18%   1.33%   1.69%   1.98%
 Previous survey  0.93%   1.10%   1.20%   1.45%   1.75%   2.10%
Two-year note     1.38%   1.48%   1.62%   1.83%   2.20%   2.53%
 Previous survey  1.40%   1.60%   1.75%   2.00%   2.25%   2.58%
Ten-year bond     2.76%   2.83%   2.90%   3.10%   3.40%   3.53%
 Previous survey  2.93%   3.00%   3.15%   3.40%   3.55%   3.70%
30-year bond      3.36%   3.50%   3.60%   3.68%   3.80%   3.95%
 Previous survey  3.50%   3.53%   3.65%   3.90%   4.00%   4.10%

To contact the reporters on this story: Greg Quinn in Ottawa at; Ilan Kolet in Ottawa at

To contact the editor responsible for this story: Dave Liedtka at