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Bank of Canada: It’s probably going to be a while before rates change

Green paper Canadian money with Bank of Canada signature and the number twenty below it.

Unsurprisingly, the Bank of Canada (BoC) announced that it will maintain its target for the overnight rate at 0.25%. Additionally, the Bank’s Governing Council reiterated that it will hold the policy interest rate near zero until the economy is running at full capacity and the 2% inflation target can be sustainably achieved. According to the Bank’s latest projections (from October), this scenario is not expected until partway into 2023.

Along with its plans for interest rates in the near future, the BoC also announced that it will continue with its quantitative easing program, purchasing securities to the tune of at least $4 billion per week in its continued efforts to bolster the Canadian economy. The maturity profile of purchased securities was left unchanged.

Recovery, the pandemic and vaccine hope

In Canada, we witnessed a sharp economic rebound in the third quarter following the dramatic drop experienced in the second quarter. Momentum in the fourth quarter also appears more robust than expected relative to the Bank’s October projections. However, the re-imposition of restrictions due to record-high cases of COVID-19 in many parts of the country, is expected to impact growth in the early part of 2021.

We’ve seen demand (and prices) for most commodities increase and the labour market continue to recover, albeit slowly and unevenly across groups of workers. The federal government’s latest support measures should help businesses and households weather the second wave of the pandemic.

Recent vaccine developments have boosted global sentiment, but logistical uncertainties have tempered expectations. At least over the short term, ongoing infections will continue to be a headwind to the global recovery.

Inflation remains below target

While inflation appears improved in the fourth quarter, the outlook remains in line with expectations. The BoC’s measures of core inflation are all below 2% and it believes unused economic productivity is expected to weigh on inflation for some time.

To close its statement, the Bank reiterated that “Canada’s economic recovery will continue to require extraordinary monetary policy support” and that it remains “committed to providing the monetary policy stimulus needed to support the recovery and achieve the inflation objective.”

Low rates for some time

At this time, we maintain our view that interest rates will remain extraordinarily low for the foreseeable future. We expect global policy makers to continue with supportive measures until the recovery is well established.

As this announcement was broadly in line with our expectations, no material changes to our strategy are currently required. Our portfolios remain cautiously positioned for low interest rates, policy accommodation, normalized volatility, and recovering economic growth.

The next BoC interest rate announcement is scheduled for January 20th, 2021 and it will be accompanied by the latest Monetary Policy Report (updated outlook and projections).

If you have any questions or require more information, please contact your MD Advisor*.

* 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

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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