Monday Market Minute | Jul 11, 2022

Recession fears mount ahead of the BoC's most consequential rate decision in a generation

What Moved

With the July 13 BoC decision days away, markets were sharply divided between a 75-basis-point hike and a 100-basis-point shock. Canadian GDP growth was decelerating, housing was in correction, and consumer confidence was cratering — yet inflation at 8.1% gave the BoC no room to ease off. Bond markets were pricing in a recession within 12-18 months, with the yield curve inverting more deeply. Overnight index swaps implied a terminal rate above 3.50%, which just months earlier had seemed extreme.

Why It Matters

The tension between inflation-fighting credibility and recession risk defined the central challenge for the BoC — and for private markets investors. In a recession, credit quality deteriorates, PE portfolio companies face revenue headwinds, and real estate valuations fall further. But in a persistent-inflation scenario, the purchasing power erosion is equally damaging. Private markets positioning required a portfolio that could withstand both outcomes: high-quality private credit, essential-service infrastructure, and counter-cyclical strategies.

Signal to Watch

The magnitude of the July hike — a 100-basis-point move would signal the BoC was prioritizing inflation-fighting over growth, with significant implications for credit risk and deal activity.

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