The yield on Canada’s 10-year government bond edged toward 3.44% on Monday, as easing domestic inflation and mounting signs of economic slack strengthened expectations for an unchanged policy stance from the Bank of Canada. Headline inflation slowed more than expected to 1.8% in February, the lowest rate since last summer and squarely in line with the midpoint of the central bank’s target range.
This disinflationary trend follows a sharp deterioration in the labor market, with the unemployment rate rising to 6.7% and the economy shedding 83,900 jobs. While global energy prices remain a potential upside risk to inflation, the 10-year yield is pulling back from its July highs as investors give greater weight to evidence of a widening output gap than to supply concerns stemming from tensions in the Middle East.
Markets are now anticipating a cautious tone from the Bank of Canada at its March 18 meeting, with the 10-year benchmark supported by a broader decline in global sovereign yields.
