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Canadian government bonds rallied across the curve after the Bank of Canada held its policy interest rate steady and Governor Tiff Macklem described the economy as “weak.”
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The yield on benchmark two-year Canadian debt was down to 2.836 per cent shortly after 11:30 a.m. New York time. Earlier in the day, it traded as high as 2.882 per cent.
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Macklem said policymakers are watching to see whether higher energy prices leader to broader inflation pressure. In that case, “there may be a need for consecutive increases in the policy rate,” Macklem said, echoing a statement from the previous rate decision on April 29. But bond traders appeared to dismiss that threat.
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“It’s a bit surprising that Macklem largely repeated the language used in April, given the persistent weakness in Canadian economic indicators and the tame nature of underlying inflation,” Royce Mendes, head of macro strategy at Desjardins Securities, said in a note. “That said, markets aren’t taking the bait this time.”
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Macklem told reporters that officials don’t believe the economy is in recession, though output has contracted for two quarters in a row.
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