The Bank of Canada delivered yet another interest rate hike, taking its key policy rate to 4.25%. Greg Bonnell speaks with Scott Colbourne, Managing Director, Active Fixed Income at TD Asset Management, about the outlook for rates going forward and the implications for markets.
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Well, the Bank of Canada raised interest rates another 50 basis points today, marking the seventh hike in a row. And while our central bank did flag inflation as a continuing issue, they also signaled that this hiking cycle may be coming to a close soon.
Joining us now is Scott Colburn, managing director of active fixed income at TD Asset Management. Great to have you back on the program.
It's great to be here, Greg.
So let's talk about what we got from the Bank of Canada today. That seems to be the read out there on the market right now, that there's a pretty clear indication from the bank that they may have come to the end or are coming to the end soon. Is this the way we should be reading today's announcement?
Yeah, I think there's a little bit of everything in the market today for both the hawks and the doves, right? We went into it, and the market was split between 25 and 50 basis points. We got 50, so a little bit more hawkish. But the language has changed, to your point.
Now it's a question of-- they were going to raise rates, will raise rates. Now we're going to consider whether we're going to raise rates going forward. So there's an optionality. There's a data dependency that the Bank of Canada is focusing on now. And the question is whether the next one is zero, the end of the rate cycle, or is it a 25?
And so this is the trajectory a lot of central banks have taken us. It was-- been a focus on pace, rapidly front loading rate hikes. And we're getting towards the end of that, whether it's the Fed or the Bank of Canada or the RBA or others. Now it's like, where are we going to end up? What's the terminal rate? And then how long are we going to stay there is sort of the trajectory that I'm looking at as an investor.
I mean, the whole point of raising rates like this to try to tame inflation is to be restrictive, right, to put the brakes on the economy to a certain degree. I imagine at 4 and 1/4 percent, we're fully restrictive. I guess an argument can be made that have we made-- are we at the point where we think we can cool inflation with a rate like this?
And I think that's the debate that everybody's having, right? So monetary policy works with a lag. And so we're starting to see-- in the last GDP data, we saw domestic demand softening, right? Both on the housing side and the consumption--
So there's evidence that the rate increases, these rapid rate increases are starting to feed through in the economy. But as the Bank of Canada has pointed out, inflation is still high. It's peaking, and it's coming over, but it's still unacceptably high. There's still lots of uncertainty.
So we've got to let things sort of feed through, trickle through, and see how monetary policy's impact is going to feed into the domestic and the global economy. So it's time to reflect, time to step back from these rapid increases, and focus more on maybe we just need a pause here. We'll assess the data over the next-- and the next meeting's in January. And we'll see where we go from here.
But the market now, going forward into January is sort of split between 0 and 25. So it's sort of like today except on less of a note.
A best case scenario is, of course, they've just, as you said, front-loaded a lot of pretty big rate hikes this year. You get inflation under control. You get it moving in the right direction. You don't do too much damage to the economy, although you slow it down.
Let's talk about the yield curve, the inversion that we're seeing on the Canadian curve, and what it tells us.
Look, the most dangerous words in the investing language, it's different this time, right? So a lot of people are pushing back on the concept of a recession, both domestically and the Canadian Bond market as well as in the US market. It's very inverted. It's been a reliable indicator, not a great timing indicator. So we don't know when. But I would bank on the fact that there is going to be a recession in both Canada and the United States.
We can discuss how severe and how deep, and whether it's a shallow or a modest recession. But I think we are definitely taking the signal from the bond market that we are going to have a recession. And that's the lagged impact of these rapid rate increases. And it makes sense, therefore, for the Bank of Canada to step back and assess here.
Is the bond market telling us something about the nature of the recession? We said we can discuss this, so let's discuss it, right? I mean, as I said, best case scenario scenarios is, oh, you get a modest recession that you get out of fairly quickly, and we get the job done. But of course, the worst case scenario is that you see mass unemployment, you see the things that happen during a deep recession. Can we avoid that scenario?
Well, I think one of the keys to that is the employment market. And it's still, I would say in both Canada and the United States, still a solid job market. And to the extent that that is a harbinger of the extent of the recession, we definitely have seen employment growth slow down. But wages are still solid. We've had a solid number out of the US. I think that, so far, the indications are that the employment market tells us that the slowdown is going to be more modest.
Is there an element, maybe, of surprise of how resilient-- I think even the Bank of Canada had to admit today that the economy's been a little more resilient in the face of what they've been doing because as we said, these have been big rate hikes we weren't anticipating heading into this year. But the labor market remains resilient. GDP also some consumption softness, but there seems to be more strength there than most people bet on.
Yeah, I think that is a theme, a consistent theme globally, right? Both Canada and the United States, the North American economies, have demonstrated a resiliency that, initially, the models, the forecasting, the policy expectations would be for more of an impact. And whether it was the policies, fiscal policies, the policies that were directed to us during the pandemic--
Savings have been good. There's been a solid labor market adjustments. Commodity markets were a tailwind for Canada. So the unwind of this is taking a lot longer than perhaps the policymakers would have thought. So, to me, that underscores a bit of a resiliency in the global economy and the domestic economy.
The more likely scenario is that we start to see a rate pause rather than a rapid turn towards cuts. The market always flirts with, OK, central banks are done, now they're going to cut. Well, maybe in this circumstance, given the resiliency in the employment market, given the resiliency in the economy, that the right response would be to pause and really assess on the inflation front.
You mentioned the global economy. What about the global situation with central banks? I mean, we are where we're at right now in Canada, with the Bank of Canada signaling maybe we're done or maybe we're going to get a modest one the next time around. But we have different factors at play in our economy.
I think of the housing market. I think out of our debt. What about some of the other central banks?
Well, we got an indication this week from the Reserve Bank of Australia-- so there's some similarities with Canada, a commodity-based economy. They raised rates 25 basis points, but their messaging was a little bit more hawkish. There's likely more rate hikes to come.
So going back to that sort of tiered approach to policy that I sort of laid out, the pace-- well, the pace of rate hikes in Australia also sort of lessened. Now it's where do we get the rates? So both the Fed, the Bank of Canada, and the RBA and other central banks are still saying there's a little bit of a ways to go. We may be in the seventh, eighth inning of rate hikes, but we're closer towards the end.
And then it's like, how long do we stay there? How does inflation play out? How does the wage market, the employment market play out? How sticky is inflation?
We know inflation's going to fall next year, especially given the commodity price declines and supply chain adjustments. Is it going to come down back towards the 2% level, or is it going to be stickier at around 3% or more?
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Well, the Bank of Canada raised interest rates another 50 basis points today, marking the seventh hike in a row. And while our central bank did flag inflation as a continuing issue, they also signaled that this hiking cycle may be coming to a close soon.
Joining us now is Scott Colburn, managing director of active fixed income at TD Asset Management. Great to have you back on the program.
It's great to be here, Greg.
So let's talk about what we got from the Bank of Canada today. That seems to be the read out there on the market right now, that there's a pretty clear indication from the bank that they may have come to the end or are coming to the end soon. Is this the way we should be reading today's announcement?
Yeah, I think there's a little bit of everything in the market today for both the hawks and the doves, right? We went into it, and the market was split between 25 and 50 basis points. We got 50, so a little bit more hawkish. But the language has changed, to your point.
Now it's a question of-- they were going to raise rates, will raise rates. Now we're going to consider whether we're going to raise rates going forward. So there's an optionality. There's a data dependency that the Bank of Canada is focusing on now. And the question is whether the next one is zero, the end of the rate cycle, or is it a 25?
And so this is the trajectory a lot of central banks have taken us. It was-- been a focus on pace, rapidly front loading rate hikes. And we're getting towards the end of that, whether it's the Fed or the Bank of Canada or the RBA or others. Now it's like, where are we going to end up? What's the terminal rate? And then how long are we going to stay there is sort of the trajectory that I'm looking at as an investor.
I mean, the whole point of raising rates like this to try to tame inflation is to be restrictive, right, to put the brakes on the economy to a certain degree. I imagine at 4 and 1/4 percent, we're fully restrictive. I guess an argument can be made that have we made-- are we at the point where we think we can cool inflation with a rate like this?
And I think that's the debate that everybody's having, right? So monetary policy works with a lag. And so we're starting to see-- in the last GDP data, we saw domestic demand softening, right? Both on the housing side and the consumption--
So there's evidence that the rate increases, these rapid rate increases are starting to feed through in the economy. But as the Bank of Canada has pointed out, inflation is still high. It's peaking, and it's coming over, but it's still unacceptably high. There's still lots of uncertainty.
So we've got to let things sort of feed through, trickle through, and see how monetary policy's impact is going to feed into the domestic and the global economy. So it's time to reflect, time to step back from these rapid increases, and focus more on maybe we just need a pause here. We'll assess the data over the next-- and the next meeting's in January. And we'll see where we go from here.
But the market now, going forward into January is sort of split between 0 and 25. So it's sort of like today except on less of a note.
A best case scenario is, of course, they've just, as you said, front-loaded a lot of pretty big rate hikes this year. You get inflation under control. You get it moving in the right direction. You don't do too much damage to the economy, although you slow it down.
Let's talk about the yield curve, the inversion that we're seeing on the Canadian curve, and what it tells us.
Look, the most dangerous words in the investing language, it's different this time, right? So a lot of people are pushing back on the concept of a recession, both domestically and the Canadian Bond market as well as in the US market. It's very inverted. It's been a reliable indicator, not a great timing indicator. So we don't know when. But I would bank on the fact that there is going to be a recession in both Canada and the United States.
We can discuss how severe and how deep, and whether it's a shallow or a modest recession. But I think we are definitely taking the signal from the bond market that we are going to have a recession. And that's the lagged impact of these rapid rate increases. And it makes sense, therefore, for the Bank of Canada to step back and assess here.
Is the bond market telling us something about the nature of the recession? We said we can discuss this, so let's discuss it, right? I mean, as I said, best case scenario scenarios is, oh, you get a modest recession that you get out of fairly quickly, and we get the job done. But of course, the worst case scenario is that you see mass unemployment, you see the things that happen during a deep recession. Can we avoid that scenario?
Well, I think one of the keys to that is the employment market. And it's still, I would say in both Canada and the United States, still a solid job market. And to the extent that that is a harbinger of the extent of the recession, we definitely have seen employment growth slow down. But wages are still solid. We've had a solid number out of the US. I think that, so far, the indications are that the employment market tells us that the slowdown is going to be more modest.
Is there an element, maybe, of surprise of how resilient-- I think even the Bank of Canada had to admit today that the economy's been a little more resilient in the face of what they've been doing because as we said, these have been big rate hikes we weren't anticipating heading into this year. But the labor market remains resilient. GDP also some consumption softness, but there seems to be more strength there than most people bet on.
Yeah, I think that is a theme, a consistent theme globally, right? Both Canada and the United States, the North American economies, have demonstrated a resiliency that, initially, the models, the forecasting, the policy expectations would be for more of an impact. And whether it was the policies, fiscal policies, the policies that were directed to us during the pandemic--
Savings have been good. There's been a solid labor market adjustments. Commodity markets were a tailwind for Canada. So the unwind of this is taking a lot longer than perhaps the policymakers would have thought. So, to me, that underscores a bit of a resiliency in the global economy and the domestic economy.
The more likely scenario is that we start to see a rate pause rather than a rapid turn towards cuts. The market always flirts with, OK, central banks are done, now they're going to cut. Well, maybe in this circumstance, given the resiliency in the employment market, given the resiliency in the economy, that the right response would be to pause and really assess on the inflation front.
You mentioned the global economy. What about the global situation with central banks? I mean, we are where we're at right now in Canada, with the Bank of Canada signaling maybe we're done or maybe we're going to get a modest one the next time around. But we have different factors at play in our economy.
I think of the housing market. I think out of our debt. What about some of the other central banks?
Well, we got an indication this week from the Reserve Bank of Australia-- so there's some similarities with Canada, a commodity-based economy. They raised rates 25 basis points, but their messaging was a little bit more hawkish. There's likely more rate hikes to come.
So going back to that sort of tiered approach to policy that I sort of laid out, the pace-- well, the pace of rate hikes in Australia also sort of lessened. Now it's where do we get the rates? So both the Fed, the Bank of Canada, and the RBA and other central banks are still saying there's a little bit of a ways to go. We may be in the seventh, eighth inning of rate hikes, but we're closer towards the end.
And then it's like, how long do we stay there? How does inflation play out? How does the wage market, the employment market play out? How sticky is inflation?
We know inflation's going to fall next year, especially given the commodity price declines and supply chain adjustments. Is it going to come down back towards the 2% level, or is it going to be stickier at around 3% or more?
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[MUSIC PLAYING]