A cyclist passing in front of Bank of Canada building in Ottawa on Sept. 30, 2026. Photo by HYUNGCHEOL PARK/Postmedia files

Article content

Article content

It’s changed its call for no rate hikes in the near term to one 25-basis-point increase at the Dec. 9 meeting that would take the benchmark lending rate to 2.5 per cent, where it would remain for the foreseeable future, Ali Jaffery, chief economist at KPMG Canada.

Article content

Article content

Article content

“The bond market is demanding that policy become more credible — whether that is monetary, fiscal or otherwise — in a world where capital is in high demand,” he said in a note on Friday. “The principle makes sense, but the magnitude of the moves (in bond yields) has revealed that this is a shoot-first-ask-questions-later approach to global inflation and fiscal sustainability issues.”

Article content

Article content

By “credible,” Jaffery said he means bond markets are demanding policymakers show they’re taking the inflation threat posed by the energy crisis seriously as well as the debt dilemmas that risk boiling over the United States, France and Japan.

Article content

“But what really worries me right now is that the bond market is being indiscriminate,” he said.

Article content

Fiscal policy in Canada on a federal level is “pretty reasonable,” he said, and monetary policy — interest rate setting — isn’t terrible either given the state of Canadian economy.

Article content

“The bond market is now imposing a premium and Canada is being swept up in that,” he said.

Article content

Global bond rates have been on the rise and Canada hasn’t been spared.

Article content

The Government of Canada five-year bond yield on Monday was nearing four per cent, almost 100 basis points higher than a year ago, with nearly 40 per cent of the increase coming last month.

Article content

Article content

He said another reason for the rise in Canadian yields is “the ill-timed hawkish tone from Bank of Canada governor Tiff Macklem at the last press conference (on interest rates),” where he indicated the greater threat to the economy was inflation from high energy prices, not U.S. tariffs.

Article content

Article content

Jaffery traces the start of that 40-basis-point increase to Macklem’s “tough talk” at the Sept. 2 rate announcement.

Article content

Normally, he said, job reports and several consumer price index reports would rule on rates, but oil prices are now in the “driver’s seat,” so bond investors are demanding more than talk.

Article content

Jaffery also said it could prove harder for the Bank of Canada to resist the rise in U.S. interest rates because the increasing spread between the those and Canadian rates devalued the Canadian dollar, which could speed up inflation.

Article content

Long-term bond yields continue to rise despite weaker-than-expected U.S. economic data, which could stop the U.S. Federal Reserve from hiking rates in October, after raising them in September.

Article content

Karl Schamotta, chief market strategist at Corpay Inc., said yields are tracking oil prices “far more closely” than inflation.