The Bank of Canada (BoC) held their overnight rate at 1.75% on Wednesday morning as expected.
Consumer Price Index inflation in Canada remains at target, and core inflation is still around 2%, which is consistent with an economy operating near capacity. The BoC expects inflation to increase temporarily over the coming months due to year-over-year movements in gasoline prices but it should track close to the 2% target over the next couple of years.
Cautious optimism about the global economy
The Bank’s announcement contained restrained optimism about the global economy, pointing out that it’s stabilizing with growth expected to edge higher in the next two years. Global financial markets have been supported by central banks and waning concerns about a global recession. The restraint comes from ongoing trade conflicts which continue to be the biggest source of risk.
Slowing growth in Canada
Growth slowed as expected in the third quarter to 1.3%. With that, consumer spending expanded moderately thanks to strong wage growth. Housing also continues to remain strong due to population growth and low mortgage rates.
Providing stability to the Canadian housing market
Speaking of mortgage rates, this announcement focused more on the risks of low borrowing rates for Canadians and the housing market. The BoC has expressed concern previously about the vulnerability of the housing market. With mortgage rates remaining low, the risks from rising prices has increased. This is a primary factor as to why the BoC did not cut rates along with other central banks in attempts to stave off a 2019 global economic recession.
Outlook unchanged, odds of a near-term rate cut reduced
Domestic growth has slowed as expected but as mentioned earlier, the BoC expects improvement over the next two years. Nothing has changed on this front since the October Monetary Policy report. Exports contracted due to non-energy commodities. However, investment spending was stronger than expected despite continued uncertainty stemming from global trade issues. Monitoring whether this near-term strength is sustainable will be an important input in deciding if rates can remain at current levels or even move higher in 2020.
Prior to the announcement, investors were positioned for a future rate cut from the Bank of Canada. While a reduction is still expected in the near future, the probability has reduced.
Any future interest rate decisions will be made based on the Bank’s continuing assessment of the adverse impact of trade conflicts against the sources of resilience in the Canadian economy, most notably consumer spending and housing activity. Fiscal policy developments will also figure into the Bank’s updated outlook in January.
Market reactions mostly positive
Canadian markets, measured by the S&P/TSX Composite Index, trended upwards before the 10 a.m. EST announcement but moved back towards opening values throughout the day.
The reduced probability of a rate cut contributed to a strong push for the Canadian dollar (vs. USD) following the announcement.
The Government of Canada bond yield curve steepened with 10-year bond yields moving up by a greater magnitude than shorter term issues. This plays into our fixed income expectations where our portfolios are more defensively positioned with reduced interest rate risk.
At this time, we do not anticipate any material changes to our holdings and positioning as a result of Wednesday’s rate announcement. However, please don’t hesitate to reach out to your MD Advisor* with any questions about this latest rate decision or your portfolio.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec).