For most of the past year and until recently, the bond market had shown little sensitivity to the currency’s depreciating trend, as it was underpinned by a combination of “push and pull” factors: Global investors’ search for higher returns; the inclusion of SA bonds in Citi’s World Government Bond Index; and a relatively benign domestic inflation environment which led market participants to reduce the probability attached to an early start of the eventual policy tightening cycle.
However, these encouraging developments will be masked during the first half of 2015 by the impact of lower oil prices on the energy sector. Later in the year, growth in Canada’s nonenergy economy should re-emerge as our dominant trend. But the first-half slowdown represents a material setback in the Bank’s projected return to full employment and sustainable 2 per cent inflation.