To no one’s surprise, the Bank of Canada today maintained the overnight rate at 1.50% while pointing to further rate increases in the near future based on strong economic and labour conditions. Today’s announcement confirmed our expectation and signaled that future rate hikes will be modest.
Support for future rate hikes
The Bank of Canada might have paused, but more rate hikes are around the corner due to a strong outlook for the Canadian economy. The economic good news has come from shrinking reliance on household spending and a greater contribution to growth from exports and business spending. Labour conditions also remain healthy—in July the unemployment rate fell to 5.8%. In the U.S., a strong economic outlook is another positive for Canada.
While the Canadian economy is thriving, there is reason to believe future rate hikes will be modest. Despite a strong labour market, wage inflation remains muted. Uncertainty also persists around trade, particularly the future of the North American Free Trade Agreement, which could impact business investment and consumer spending.
Ahead of today’s announcement, the Canadian dollar moved up against the U.S. dollar, a gain that was quickly reversed. The Bank, in its announcement, did point to higher than expected inflation—3.0% versus the bank’s target rate of 2.0%—however the increase is expected to be temporary. Based on today’s decision, our bond portfolio continues to be well-positioned for future increases to short-term rates.
Read the full Bank of Canada statement.
Wesley Blight, CFA, CIM, FCSI, is an Assistant Vice President with the Investment Management and Strategy team at MD Financial Management. He is responsible for the investment results of the firm’s fixed income and multi-asset products.