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Amidst mostly positive news, the Bank of Canada eases up on bond purchases, keeps rates steady

As the global economy works its way back from the depths of the COVID-19 pandemic, the Bank of Canada (BoC) struck a positive note, holding its target overnight rate steady at 0.25% while adjusting its bond purchases to $2 billion per week, down from $3 billion.

Plenty of good news

Much of the good economic news is directly connected to getting shots in arms as continued progress on vaccinations powers forth a strong recovery. The BoC now expects higher global growth – 7% for this year, falling to 4.5% in 2022 and 3% in 2023.

All eyes are on household consumption which is expected to lead the economic recovery along with growing international demand and increased business confidence and investment. That demand will also support higher prices for commodities, especially oil.

Employment is bouncing back with even the hardest hit sectors set to post job gains as the economy reopens.

Not out of the woods yet

As some parts of the global economy power forward, the recovery remains at risk due to uneven access to vaccines globally, varying rates of vaccination, and the emergence of new COVID-19 variants. And while the employment picture is looking brighter, Canadian businesses could struggle to find workers with the right skills, especially given the impact lockdowns and the pandemic have had on workers and the overall economy. 

Second quarter stumble

Here in Canada, the economy stumbled in the second quarter due to the third wave of the virus, but conditions now support a strong pickup later this year. The BoC now expects growth to hit around 6% this year (down slightly) but the 2022 forecast has ticked up to 4.5% followed by 3.25% in 2023.

No inflation worries

The BoC remains unfazed by higher short-term inflation – 3.6% in May – and maintains it is due to temporary factors such as supply chain disruption and ongoing supply bottlenecks. The Bank expects inflation to stay above 3% throughout the year before easing back towards 2% in 2022 when these short-term supply issues are resolved.

The BoC is proceeding with caution and will keep its target interest rate low until that 2% inflation target is sustainably achieved. Look to the second half of 2022 for that to happen.

Announcement is in line with our expectations

Overall, our portfolios continue to be positioned with an overweight allocation to equities. With the economic recovery strengthening, equity is expected to outperform. From a fixed income perspective, as we believe rates will continue to move modestly higher, duration exposure has been reduced to nearly 2 years short relative to the pool’s benchmark within domestic mandates. With spreads tight (spread refers here to the difference in return between government bonds and corporate bonds of the same maturity), we are neutral-to-slightly overweight corporate bonds in Canada as fundamentals are strong.

Please contact your MD Advisor* if you have any questions or require more information.

* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec).

The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.

About the Author

Belgacem Ghazi is a Senior Quantitative Investment Analyst with the Multi-Asset Management team at MD Financial Management. He is responsible for the private equity and private real estate MD Platinum Pools as well as MD’s multifactor strategy.

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