Monday Market Minute | Dec 5, 2022

Markets brace for the BoC's likely final hike — the question shifts from 'how high' to 'how long'

What Moved

Heading into the December 7 rate decision, markets had fully priced in a 50-basis-point hike to 4.25%, with growing consensus that it would be the last of the cycle. The BoC's October statement had laid the groundwork, suggesting the end of tightening was "getting closer." Inflation had eased from 8.1% to 6.9%, still far above target but trending in the right direction. The Canadian economy was showing clear signs of deceleration — housing was in correction, consumer spending was softening, and business investment intentions were declining.

Why It Matters

The shift from "how high" to "how long" was consequential for private markets positioning. If rates stabilized at 4.25%, floating-rate private credit yields would plateau at attractive levels for an extended period rather than continuing to rise. PE sponsors could finally underwrite deals with confidence in the cost of capital. The key uncertainty became duration: would the BoC hold at restrictive levels for quarters or years? The answer would determine whether 2023 brought stabilization or recession.

Signal to Watch

The BoC's December Monetary Policy Report and press conference — the specific language around the pause would set the framework for 2023 rate expectations.

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