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The Bank of Canada is unlikely to raise rates any time soon

           A looney in a suspended copper bowl.

As expected, the Bank of Canada (BoC)maintained its key overnight rate at 1.75%, citing the overall weak growth from the Canadian and the global economy.

The overnight rate has been 1.75% since October, after it was increased five times since 2017. Interestingly, the BoC removed all language supporting their bias for higher rates—signalling that the key policy rate is now unlike to rise in the immediate future.

The Council said in its announcement that it “judges that an accommodative policy interest rate continues to be warranted. We will continue to evaluate the appropriate degree of monetary policy accommodation as new data arrive."

Rationale: Geopolitical tension, oil prices, housing policy and borrowing rates

The rate was kept the same due to several factors. Governor Stephen Poloz pointed to the continuing uncertainty around geopolitical tensions such as trade tariffs and Brexit which has led to the undermining of business sentiment and activity. This has led to a slowdown across many economies, worse than predicted in the Bank's Monetary Policy Report in January.

In response, several central banks have adapted or indicated that they are taking a slower approach to monetary policy normalization.

The BoC has revised its Canadian economic growth outlook to 1.2% for 2019, 2.1% for 2020 and 2.0% for 2021.

Ongoing concerns about household debt, a weaker-than-expected housing market and a slowdown in investments in the oil and energy sector due to last year's decline in oil prices have also played a role in the decision.

Interesting to note, market sentiment and financial conditions have improved due to softer stances on interest rates, which has since pushed up the price of oil and other commodities.

There's light at the end of the tunnel

It's not all bad news though. The Bank expects both the global and Canadian economy to pick back up in the second quarter of the year.

They predict a stronger housing market due to population growth, the fading effects of past housing policy changes, as well as improved global financial conditions. Consumption should see a boost from the strong growth in employment income here in Canada. Outside of the oil and gas sector, investment will be supported by high utilization of capacity and stronger global demand is expected to expand exports.

Inflation also appears to be in check as measures of core inflation are all close to 2.0%—the Banks target.

No material change to our strategy

Relating to the announcement, we did see some market activity. The S&P/TSX Composite Index dipped prior to the announcement, climbed shortly after and forfeited gains throughout the rest of the day. We also saw drops in the Canadian dollar (vs. USD) and Government of Canada bond yields.

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, 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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