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CANADA: Watching Savings As An Additional Clue For BoC Terminal Rate (3/3)

MARKET INSIGHT
  • The housing market is clearly important, but the BoC’s terminal rate will also depend on the evolution of household savings.
  • 2Y OIS rates have climbed relentlessly this year, broadly in lockstep with the US until most recently being overtaken as the US breached 4% - which included a terminal rate seen briefly nudging 4.5% - after surprise strength in August CPI.
  • There are however clear differences in household saving ratios, which could see differences in how the remainder of the rate hiking cycle plays out (with the BoC at 3.25% and Fed likely 3-3.25% next week).
  • The US savings rate has fallen far below pre-pandemic levels but the Canadian savings ratio can still fall much further - if households are willing to run those low levels of precautionary savings - supporting consumption and demand-driven inflationary pressures in the process.
  • The BoC has talked of upside risk to consumer spending from households spending accumulated extra savings from the pandemic, but equally, a stalling at the current level of savings could begin to weigh on demand and is worth watching closely as the economy slows as tighter financial conditions bite.

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  • The housing market is clearly important, but the BoC’s terminal rate will also depend on the evolution of household savings.
  • 2Y OIS rates have climbed relentlessly this year, broadly in lockstep with the US until most recently being overtaken as the US breached 4% - which included a terminal rate seen briefly nudging 4.5% - after surprise strength in August CPI.
  • There are however clear differences in household saving ratios, which could see differences in how the remainder of the rate hiking cycle plays out (with the BoC at 3.25% and Fed likely 3-3.25% next week).
  • The US savings rate has fallen far below pre-pandemic levels but the Canadian savings ratio can still fall much further - if households are willing to run those low levels of precautionary savings - supporting consumption and demand-driven inflationary pressures in the process.
  • The BoC has talked of upside risk to consumer spending from households spending accumulated extra savings from the pandemic, but equally, a stalling at the current level of savings could begin to weigh on demand and is worth watching closely as the economy slows as tighter financial conditions bite.