Christopher Reid is the Deputy Managing Director of the Banking and Payments department. He is responsible for overseeing the Payments and Settlement Operations and the Risk and Compliance functions in the department. Chris first joined the Bank in 1999 as an Economist in the International department and has since held increasingly senior positions in the Financial Market Department and the Financial Stability Department. He has been a Senior Director in Payments System Oversight and was the leader of the Calgary Operational Site from mid-2021 to late-2022. More recently, he acted as FMD’s lead on fiscal agent matters and he was the Bank’s co-chair of the Foreign Reserves Committee and the Debt and Treasury Management Committee.
According to the Fisher hypothesis, the gap between Canadian nominal and Real Return Bond yields (or break-even inflation rate) should be a good measure of inflation expectations.
Since 1997 when the Bank of Canada last published a review of the Canadian overnight market, several important changes have affected the market's structure and dynamics. Reid provides a current overview of the market, examining the financial instruments, market transparency and flows, and the collateralized overnight rate as it has evolved since the introduction of the Large Value Transfer System and the fixed announcement dates. Other significant influences include changes in market practices regarding risk management, the rise of securities lending, the increased demand for collateral, and the Bank of Canada's measures to reinforce the target for the overnight rate.
The break-even inflation rate (BEIR) is calculated by comparing the yields on conventional and Real Return Bonds. Defined as the average rate of inflation that equates the expected returns on these two bonds, the BEIR has the potential to contain useful information about long-run inflation expectations. Yet the BEIR has been higher, on average, and more variable than survey measures of inflation expectations, which may be explained by the effects of premiums and distortions embedded in the BEIR. Because of the difficulty in accounting for these distortions, the BEIR should not be given a large weight as a measure of long-run inflation expectations at this time. However, as the Real Return Bond market continues to develop, the BEIR should become a more useful indicator of inflation expectations. At present, it demonstrates no clear advantage over survey measures and even past inflation rates in forecasting near-term inflation.
