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With inflation continuing its downward trend, the Bank of Canada lowered its overnight rate by another 25 basis points to 4.25%. Elaine Lindhorst, Senior Portfolio Manager, Active Fixed Income at TD Asset Management, speaks with MoneyTalk’s Anthony Okolie about why she believes more cuts are likely in the near term.
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[AUDIO LOGO]
- As expected, the Bank of Canada has lowered its overnight rate by a quarter of a percent, its third consecutive cut. Joining me now to discuss is Elaine Lindhorst of TD Asset Management. And Elaine, did anything surprise you today?
- No, Anthony, no surprises. As you said, this was fully priced in by the market. But more importantly, the data supported this cut. When you consider inflation in Canada, in July, our rate was 2.5%. That's firmly within the Bank of Canada's target range. And it's the seventh reading we've had there.
So when you consider two years ago, summer of 2022, we had 8% inflation. That's firmly behind us at this point. And those high interest rates that we have had here in Canada are no longer warranted.
- Now, we've seen three rate cuts. Do you think the Bank of Canada has to pause at this point, or will we see more cuts further down the road?
- So no pause is in sight. And I'll tell you why. When you consider the data, it doesn't support pausing at this point. So inflation within target-- and actually, when you break inflation down further and you take out mortgage costs, which are, arguably, driven by higher interest rates, we're actually below that target range of the Bank of Canada.
Unemployment data has weakened. So we're almost 2% higher unemployment here in Canada than we were at the beginning, when the Bank of Canada started raising interest rates. So we're at 6.4%. And when you consider that, it-- historically, it's not a high rate. But 1.5 million Canadians, roughly, have lost their jobs-- so a weakening of labor.
And then economic growth-- it is not robust in Canada. It is positive, but not robust. And then when you further break down economic data, you consider it on a per-capita basis. So how much is each person producing? We've actually lost multiple percents of growth there since the Bank of Canada started hiking.
- And how are money markets pricing in moves in the Bank of Canada's overnight rate for the rest of the year?
- So looking forward, the Bank of Canada's next scheduled meetings are in October, December, and January. At each of those meetings, a quarter-percent cut is priced in. Then if you go further to the end of July of next year, it's actually almost six cuts priced in. So we're looking at an overnight interest rate closer to 3% in 2025.
- Now, currently, markets are pricing in a Fed cut in September. Do you see this reducing the downward pressure on the Canadian dollar and, more importantly, easing the risk of importing price inflation here in Canada?
- Yes, absolutely. So when you think of our overnight rate now, we're roughly a percent below the US overnight rate. And historically, since the great financial crisis, that's really the maximum-- it's roughly the maximum that we have been. And if the Fed had not changed their rhetoric and did not start to cut interest rates, then yes, we would have expected an impact from that.
- Talk a little bit about the risks for the Bank of Canada, particularly the housing market. Is there a risk that the housing market could heat up after this third cut?
- So at this point-- no signs of re-acceleration in the housing market here in Canada. And over the near term, we would expect that to continue. Two key points-- first of all, immigration has been extremely strong in Canada. And when you consider immigration, arguably, that is a strong supporter of the housing market.
Second is resets of mortgage rates. So when you consider the Canadian economy, the bulk of Canadians have not reset their mortgages yet. And that wall of resets should occur spring of next year. At that point, Canadians will be looking at mortgage rates that are multiple percent higher than they are currently. And that will also work to contain the housing market.
- Looking ahead, what are the indicators you'll be watching closely as the Bank of Canada considers its next move?
- So I would say that we're focused on the downside risk. When you consider inflation, those high inflation prints are in the past at this point. So it's really about the labor market. Does it hold up? It's about the economic growth in Canada. How does that work out?
And lastly, obviously, our US partners-- because the United States continues to be our predominant trading partner. So how they fare will affect our economy as well. So lots to watch-- and stay tuned.
[AUDIO LOGO]
[UPBEAT MUSIC]
- As expected, the Bank of Canada has lowered its overnight rate by a quarter of a percent, its third consecutive cut. Joining me now to discuss is Elaine Lindhorst of TD Asset Management. And Elaine, did anything surprise you today?
- No, Anthony, no surprises. As you said, this was fully priced in by the market. But more importantly, the data supported this cut. When you consider inflation in Canada, in July, our rate was 2.5%. That's firmly within the Bank of Canada's target range. And it's the seventh reading we've had there.
So when you consider two years ago, summer of 2022, we had 8% inflation. That's firmly behind us at this point. And those high interest rates that we have had here in Canada are no longer warranted.
- Now, we've seen three rate cuts. Do you think the Bank of Canada has to pause at this point, or will we see more cuts further down the road?
- So no pause is in sight. And I'll tell you why. When you consider the data, it doesn't support pausing at this point. So inflation within target-- and actually, when you break inflation down further and you take out mortgage costs, which are, arguably, driven by higher interest rates, we're actually below that target range of the Bank of Canada.
Unemployment data has weakened. So we're almost 2% higher unemployment here in Canada than we were at the beginning, when the Bank of Canada started raising interest rates. So we're at 6.4%. And when you consider that, it-- historically, it's not a high rate. But 1.5 million Canadians, roughly, have lost their jobs-- so a weakening of labor.
And then economic growth-- it is not robust in Canada. It is positive, but not robust. And then when you further break down economic data, you consider it on a per-capita basis. So how much is each person producing? We've actually lost multiple percents of growth there since the Bank of Canada started hiking.
- And how are money markets pricing in moves in the Bank of Canada's overnight rate for the rest of the year?
- So looking forward, the Bank of Canada's next scheduled meetings are in October, December, and January. At each of those meetings, a quarter-percent cut is priced in. Then if you go further to the end of July of next year, it's actually almost six cuts priced in. So we're looking at an overnight interest rate closer to 3% in 2025.
- Now, currently, markets are pricing in a Fed cut in September. Do you see this reducing the downward pressure on the Canadian dollar and, more importantly, easing the risk of importing price inflation here in Canada?
- Yes, absolutely. So when you think of our overnight rate now, we're roughly a percent below the US overnight rate. And historically, since the great financial crisis, that's really the maximum-- it's roughly the maximum that we have been. And if the Fed had not changed their rhetoric and did not start to cut interest rates, then yes, we would have expected an impact from that.
- Talk a little bit about the risks for the Bank of Canada, particularly the housing market. Is there a risk that the housing market could heat up after this third cut?
- So at this point-- no signs of re-acceleration in the housing market here in Canada. And over the near term, we would expect that to continue. Two key points-- first of all, immigration has been extremely strong in Canada. And when you consider immigration, arguably, that is a strong supporter of the housing market.
Second is resets of mortgage rates. So when you consider the Canadian economy, the bulk of Canadians have not reset their mortgages yet. And that wall of resets should occur spring of next year. At that point, Canadians will be looking at mortgage rates that are multiple percent higher than they are currently. And that will also work to contain the housing market.
- Looking ahead, what are the indicators you'll be watching closely as the Bank of Canada considers its next move?
- So I would say that we're focused on the downside risk. When you consider inflation, those high inflation prints are in the past at this point. So it's really about the labor market. Does it hold up? It's about the economic growth in Canada. How does that work out?
And lastly, obviously, our US partners-- because the United States continues to be our predominant trading partner. So how they fare will affect our economy as well. So lots to watch-- and stay tuned.
[AUDIO LOGO]
[UPBEAT MUSIC]
