Canadian bonds fall as Bank of Canada leaves policy rate unchanged

The Canadian bonds prices edged down, sending yields higher on Thursday as investors cooled on safe-haven assets after Bank of Canada announced no change in its policy rate on Wednesday. The yield on the benchmark 10-year bonds, which moves inversely to its price, moved higher 2.64 pct to 1.282 pct and the yield on the 3-year bonds rose 2.94 pct to 0.631 pct by 1328 GMT.

Yesterday, the Bank of Canada announced no change in the overnight rate target of 0.50%, in line with market expectations. Overall, the risks to the profile for inflation are roughly balanced. Meanwhile, financial vulnerabilities continue to edge higher, in part due to regional shifts in activity associated with the structural adjustment underway in Canada’s economy.

According to the statement, growth in the global economy is expected to strengthen gradually from about 3 pct in 2016 to 3.5 pct in 2017-18, a weaker outlook than the Bank had projected in its January MPR, though financial conditions were seen as improving. Overall, the US economy is expected to regain momentum, but with a lower profile and a composition that is less favourable for Canadian exports. The statement noted that the economy continues to create net new employment, especially in services, despite job losses in resource-intensive regions.

In this context, household spending continues to expand moderately. According to the Bank of Canada, expectations are now for real GDP growth of 1.7 pct in 2016, 2.3 pct in 2017 and 2.0 pct in 2018.

"We do not think the BoC is about to cut interest rates further; instead we expect it to await further developments on the oil price and see what impact this has on the Canadian economy.  We expect the BoC to increase interest rates for the first time in summer 2017." notes Commerzbank in a report.

Meanwhile, the investors will primarily focus on the upcoming consumer inflation and retail sales figures, which are expected to be released on 22nd April (0800GMT).