Expectations for Canadian short-term interest rates are best captured in the overnight index swap market, or OIS. Participants in the OIS market can use the swaps to hedge exposure to future Bank of Canada policy rate changes, or to speculate on them. We watch this market closely because it provides the average forecast of market participants for the path of our policy rate.
When the market shifts with some event or the release of economic data, this tells us how participants think our monetary policy will react. As such, the OIS market is crucial for telling us when there is a disconnect between expectations in the market for the economy and interest rates and our own expectations.