As expected, the Bank of Canada (BoC) announced it is holding its key interest rate steady at 1.25% and further validated our expectations for more rate hikes in 2018.
The announcement highlighted the BoC’s belief that continued wage growth will support economic expansion in Canada as housing activity is expected to rebound from its recent decline and consumer consumption improves.
The language in the announcement also supports the conviction that Canadians will be positioned to shoulder higher rates as more disposable income enables them to absorb the impact of increased rates on their debt payments.
While rising oil and gas prices could lead to higher inflation in the coming months, the impact isn’t expected to last as the Bank of Canada stays the course in its quest for stable, predictable inflation.
Domestic and international economic developments are broadly aligned with the expectations outlined in the BoC’s latest Monetary Policy Report (April 2018). A few risks remain however – geopolitical risks and ongoing uncertainty around trade policy that could temper expansion in the global economy.
The announcement prompted a modest bump in the Canadian dollar and domestic bonds yields. We continue to position our portfolios for a rising rate environment by adding appropriate diversification and holding reduced interest rate risk exposure.