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Bank of Canada: One more rate hike for 2022

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Key takeaways

  • The Bank of Canada increased its target overnight rate by another 0.5%.
  • Inflation remains high and short-term inflation expectations remain elevated.
  • The Bank will continue to assess if higher policy rates are required.

The Bank of Canada (BoC) raised its target for the overnight rate by another 0.5%, as it continues to work towards its 2% long-term inflation goal. This is the Bank’s seventh consecutive rate hike which brings the overnight rate to 4.25%, a level not seen since 2008. Quantitative tightening will also continue as planned, where maturing Government of Canada bonds held by the BoC will not be replaced.

Inflation is still too high

From the BoC’s October Monetary Policy Report (MPR), it projects CPI inflation to come down to approximately 3% by the end of 2023 and to its long-term inflation target of 2% by the end of 2024. CPI inflation remains at 6.9% at the end of October, with many large price increases for goods and services Canadians consume regularly. “Inflation is still too high and short-term inflation expectations remain elevated,” said the Bank.

There is a glimmer of hope, as the rate of change in three-month core inflation has come down, maybe an indicator that inflation may be losing momentum. However, the BoC will remain diligent in its assessment for future rate decisions – as it eloquently described, “the longer that consumer and businesses expect inflation to be above the target, the greater the risk that elevated inflation becomes entrenched.”

Of note, the Bank did alter its statement that “the policy rate will need to rise further,” from previous decisions to it “will be considering whether the policy interest rate needs to rise further…” This shift in language is interpreted as a signal that the hurdle for continued rate hikes is high.

Growth is hanging in there

As expected, global economic growth is slowing, and the Bank still expects growth to “essentially stall through the end of this year and the first half of next year.” However, compared to what was outlined in October by the BoC, the global economy is proving to be resilient. As a reminder, the BoC expects 3% growth for 2022, 1.5% for 2023, and 2.5% in 2024 as reported in the October MPR.

The BoC noted that Canadian growth was stronger than anticipated in the third quarter with the economy still operating in excess demand – unemployment remains historically low and commodity exports have been strong. Consumption in Canada did moderate slightly in the third quarter as did housing market activity. The Bank is taking this as evidence that tighter monetary policy (i.e., higher interest rates) is working to restrain domestic demand.

Policy decisions remain in line with our expectations

The direction that rates are heading in the near term are still in line with our expectations.

In our portfolios, we recently increased our allocation to equities overall and moved to a neutral position relative to fixed income (modestly overweight) and cash (modestly underweight). Risks to global markets have become more balanced – we have already seen material declines and do not expect markets to fall significantly. The risks of being underweight equities has increased as positioning for a recession is the consensus trade.

On the fixed income side, we continue to target a flatter yield curve (longer-term bond yields to decline by more than shorter-term bond yields) and a slightly long duration (interest rate sensitivity) bias in North America.

For more information about this announcement or your portfolio, please contact your MD Advisor*.

If you are wondering how rising rates will impact your finances beyond your investments, here’s what it could mean for you.

To kick off its meetings for 2023, the BoC’s next interest rate announcement is scheduled for January 25th. It will be accompanied by the latest MPR.

* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.

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

Wesley Blight, CFA, CIM, FCSI, is a Portfolio Manager with the Multi-Asset Management Team of 1832 Asset Management L.P. He is responsible for the investment results of the firm’s fixed income and multi-asset products.

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