No surprises: The Bank of Canada maintains target overnight rate as economic data remains in line with April Monetary Policy Report

May 31, 2019 Wesley Blight


Once again there were no surprises with the Bank of Canada (BoC), which maintained its target overnight rate at 1.75%, continuing the trend we've seen for the past several months.

In this week's announcement, the BoC noted that recent economic projections remain in line with expectations outlined in it's April Monetary Policy Report. Additionally, the BoC believes that the slowdown in late 2018 and early 2019 was temporary and a pickup has started in the second quarter of 2019.

As a result, the announcement had little direct impact on market activity.

Oil recovery and strong job growth

The oil sector, which has seen several fluctuations since last fall, is recovering and has seen production increase. Housing is looking better, with indicators showing a more stable national market with some regional weaknesses. Job growth also remains strong, suggesting that recent dips were temporary. Consumer spending, exports and business investment have also strengthened but it's worth noting that inventories rose sharply in the first quarter, which suggests slower production growth.

Trade tariffs affect Canadian exports

Nothing has changed drastically for the global economy which is evolving as expected. Trade conflicts continue to create uncertainty about economic prospects and we're seeing the effects of China's trade restrictions on Canadian exports such as canola. On the other hand, the recent removal of the tariffs on steel and aluminum and the possible ratification of CUSMA/USMCA is a net positive for Canadian exports and investments.

The Bank's view that the slowdown we experienced in late 2018 and early 2019 was temporary continues to be supported by data. Speaking of data, the council reiterated that it will continue to rely on data in its decision-making process, paying close attention to household spending, oil markets and global trade.

Inflation is still below the Bank's target

So what does this mean? Well, broad inflation has gradually increased to the BoC's 2.0% target. Core inflation (1.5%), which excludes volatile items such as energy remains below target. Factors that could increase inflation going forward include stronger-than-expected U.S. economic growth, improved consumption in Canada and the reduction of global trade tensions.

Increased consumer spending could also push inflation higher as borrowing rates remain low and employment remains strong. This upside risk to inflation is offset by the uncertainty created by ongoing trade disputes and the impact this has on planned business spending and global financial conditions.

Little market reaction, but the yield curve is telling a story

The S&P/TSX Composite Index started the day lower and remained relatively flat for the rest of the day. The Canadian dollar also traded slightly lower vs. the U.S. dollar and other major currencies following the announcement.

It is interesting to note that Canada's bond yield curve is currently inverted with market participants expecting the BoC to reduce their key lending rate by the end of this year. This means that short-term borrowing rates are more expensive than long-term rates. My view on this is that the BoC will find it challenging to raise rates anytime soon and economic growth in Canada is likely to face headwinds in comparison to transitory, near-term results.

So overall, no surprises with this announcement. As always, we will continue to assess market conditions and make changes when necessary. For more information about the BoC announcement or your portfolio, please contact your MD Advisor.

About the Author

Wesley Blight

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.

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