As expected, the Bank of Canada today left the overnight interest rate target unchanged at 1.25%. The resulting change in the value of our dollar was insignificant, although Canadian bond yields did decline.
The Bank continues to monitor the sensitivity of our economy to higher rates. Higher bond yields and stiffer mortgage conditions in Canada have cooled the housing market, and reduced credit growth. The Canadian consumer’s ability to spend and support economic growth will be a key factor in determining the pace and magnitude of future interest rate increases. Continued trade concerns have also added to the uncertainty. These forces are countered by ongoing global growth, currently buoyed by U.S. fiscal spending and tax cuts. It is worth noting that the expected inflation resulting from the spending announcements has helped push global bond yields higher.
MD believes that Canada’s current mix of economic conditions will moderate the pace and the level of future rate increases – although the direction is clearly up. We have positioned our portfolios accordingly with lower-than-benchmark interest rate risk and an overweight allocation to credit.