Markets right to price in rate cuts

While our GDP growth forecasts are far below consensus, the narrowing and even outright inversion of parts of the yield curve in the past month suggests that investors also have little faith in the consensus view that economic growth will accelerate later this year. Markets have begun to price in a significant chance that the Bank of Canada will cut interest rates. The policy rate for this December implied by overnight index swaps, of a little over 1.55%, is consistent with an 80% chance that the Bank will reduce interest rates from the current 1.75% to 1.5% by the end of the year. Despite the fact that the Bank clung on to the prospect of further rate hikes following March’s policy meeting, investors are therefore coming round to our long-held view that policymakers will soon reverse course.