On January 20, the Bank of Canada (BoC) announced that it would leave its key lending rate unchanged at 0.5%. In the weeks leading up to this, there had been speculation that interest rates could be cut by 0.25%.
Why did the BoC maintain the current rate?
To grow our economy, Canada’s central bank needs to strike a fine balance when targeting its key lending rate.
To help the Canadian resource sector, which is struggling with weak commodity prices, lowering the interest rate would be better. However, by keeping rates steady, the BoC seeks to contain the spending of the Canadian consumer (who’s already heavily indebted) and avoid further fueling the overheated housing market.
Inflation expectations are also critical to their decision-making process. The BoC targets 2.0% inflation, as measured by the total consumer price index. Over the 12 months to November 2015, inflation was at 1.4%, near the lower bound of the BoC’s control range. However, this is expected to increase to target in early 2017.
With the Canadian dollar having recently declined versus the USD, the BoC’s decision to leave rates unchanged resulted in only a short-lived, modest increase to the domestic currency.
While economic growth in the fourth quarter of 2015 was weaker than expected and the projected growth for 2016 was reduced, the BoC anticipates a 2.5% expansion by the end of 2017, which is one of the contributing factors for maintaining the current rate.
How does the Bank of Canada decision impact MD portfolios?
The interest rate announcement may slightly influence the real value of certain companies, such as banks, as well as the general levels for yield and the relative attractiveness of government bonds versus credit products.
There may also be some small incremental changes in the price of some securities but not in their real values, and this is something that our active managers could capitalize on.
In general, the impact of today’s announcement is minimal for MD portfolios and we are monitoring the situation closely.
We encourage you to contact your MD Advisor if you have any questions.