Comments from BOC Deputy Governor Beaudry:

  • Financial vulnerabilities can cause rate changes to have different effect in short-term than long term
  • Three main vulnerabilities: balance sheets, asset prices and risk allocation
  • If we bring financial vulnerabilities into equation, it means introducing degree of flexibility into inflation-targeting process
  • It's not yet entirely clear how important these channels are but there is sufficient evidence to warrant our attention
  • Last Oct, BOC could have considered rate cut to ensure economy didn't perform below potential
  • We judged risk of reigniting acceleration in house prices expectations and debt build up
  • Even if a rate cut looks desirable in short-term, once bank has factored in growth at risk, the cut may no longer look attractive
  • This is not a departure from our inflation-targeting objective but rather another tool to judge risk to inflation outlook

I hate this line of thinking. It's taken over central banking and here the BOC is using it to keep rates a bit higher but it's the same thinking the Fed uses to keep rates low by citing 'financial stability' which is just a code word for equity markets. If your job is to manage financial markets, then your job is to manipulate. Market participants should react to central bankers, not the other way around.

All that said, if you're trading it, there's no sense trading what should be. You trade what's real and the reality is that central banks are 'all-in' on risk assets.