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The Bank of Canada has raised its key interest rate by 25 bps to 4.75%, its first increase since announcing a pause in January. Anthony Okolie speaks with Elaine Lindhorst, Senior Portfolio Manager, Active Fixed Income at TD Asset Management, about the decision and the outlook for rates going forward.
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* Bank of Canada surprisingly raised its overnight rate 25 basis points. That ends a conditional pause that they had on since January. Elaine, what's your initial reaction to this news?
* Well, Anthony, it was a surprise to the market, because going into today's decision the market was split roughly evenly. Half expected the bank to actually be on hold. They were expecting a hike later in the Summer, and half roughly suggested that the bank could raise today, and they did. So the market is rearranging to take into account what the bank considered in their decision today.
* And do you think the Bank of Canada is done hiking rates for this year?
* That's a hard one. You look at the data, and that's what the bank is focused on. So they put that conditional pause in place back in January. They wanted to see the effects of the interest rates they had done. Very aggressive interest rate hiking cycle to the point, so they went on pause and they wanted to see the data.
* The data has been stronger. We've seen that, and that's what the bank acknowledged today. Back in April, they suggested that they could have hiked in April. So the data since April has just been stronger.
* And we had that strong jobs number, 40,000 in April. We had another strong inflation number. And the inflation is concerning, because we've gone from over 8%, but we're still over 4%. So at this point, we need to wait and see what the data continues to do.
* And as you said, Bank of Canada has said they're going to be data dependent when they make their monetary policy decisions. How are money markets right now pricing in further moves by the Bank of Canada?
* So the market continues to rearrange itself, take into account what the communication was, but it does look likely that there will be another hike, and again, data dependent. But the market sees that hike occurring potentially in July, but by September of this year. So another 1/4% hike, taking us to 5%.
* Terminal rate. Now, it seems that rate cut expectations are increasingly off the table this year, of course. What's your outlook for rate cuts by the Bank of Canada?
* It would be very hard to put a cut through, at this point, because inflation has remained strong. It's still above 4%. The bank wants it to be 3% by the summer.
* That is looking questionable, at this point. And also, the GDP, GDP has been very strong. So the economy is running strong. Consumers are spending. Businesses are hiring, and it makes for strong pressures on the inflationary market.
* Now, let's talk a little bit about the Canadian dollar, because we did see quite a strong move just after the decision. Where do you see the loonie going in the next little while?
* Well, the Canadian dollar has been driven by interest rates, and today's no exception, and that's something that we would expect to see continue.
* Now, beyond inflation and recession worries, what is the biggest risk to the Bank of Canada's outlook right now?
* So top of mind for the bank has to be the other side. What happens to our consumer? Our consumer is highly indebted. We're the most indebted economy of the G7.
* Should that consumer not be able to service their debts, if the interest rates are too high, if the economy weakens, if jobs start to be lost, how will that affect the system? So the greater financial stability could be affected. So they need to weigh all of these factors when they make those further interest rate decisions.
* As we look ahead to the next Bank of Canada meeting, what are some of the things you'll be watching closely?
* Oh, there's some key data coming up. We have jobs numbers. We have more inflation data. And these are all key to what the Bank of Canada will consider in their next interest rate.
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* Well, Anthony, it was a surprise to the market, because going into today's decision the market was split roughly evenly. Half expected the bank to actually be on hold. They were expecting a hike later in the Summer, and half roughly suggested that the bank could raise today, and they did. So the market is rearranging to take into account what the bank considered in their decision today.
* And do you think the Bank of Canada is done hiking rates for this year?
* That's a hard one. You look at the data, and that's what the bank is focused on. So they put that conditional pause in place back in January. They wanted to see the effects of the interest rates they had done. Very aggressive interest rate hiking cycle to the point, so they went on pause and they wanted to see the data.
* The data has been stronger. We've seen that, and that's what the bank acknowledged today. Back in April, they suggested that they could have hiked in April. So the data since April has just been stronger.
* And we had that strong jobs number, 40,000 in April. We had another strong inflation number. And the inflation is concerning, because we've gone from over 8%, but we're still over 4%. So at this point, we need to wait and see what the data continues to do.
* And as you said, Bank of Canada has said they're going to be data dependent when they make their monetary policy decisions. How are money markets right now pricing in further moves by the Bank of Canada?
* So the market continues to rearrange itself, take into account what the communication was, but it does look likely that there will be another hike, and again, data dependent. But the market sees that hike occurring potentially in July, but by September of this year. So another 1/4% hike, taking us to 5%.
* Terminal rate. Now, it seems that rate cut expectations are increasingly off the table this year, of course. What's your outlook for rate cuts by the Bank of Canada?
* It would be very hard to put a cut through, at this point, because inflation has remained strong. It's still above 4%. The bank wants it to be 3% by the summer.
* That is looking questionable, at this point. And also, the GDP, GDP has been very strong. So the economy is running strong. Consumers are spending. Businesses are hiring, and it makes for strong pressures on the inflationary market.
* Now, let's talk a little bit about the Canadian dollar, because we did see quite a strong move just after the decision. Where do you see the loonie going in the next little while?
* Well, the Canadian dollar has been driven by interest rates, and today's no exception, and that's something that we would expect to see continue.
* Now, beyond inflation and recession worries, what is the biggest risk to the Bank of Canada's outlook right now?
* So top of mind for the bank has to be the other side. What happens to our consumer? Our consumer is highly indebted. We're the most indebted economy of the G7.
* Should that consumer not be able to service their debts, if the interest rates are too high, if the economy weakens, if jobs start to be lost, how will that affect the system? So the greater financial stability could be affected. So they need to weigh all of these factors when they make those further interest rate decisions.
* As we look ahead to the next Bank of Canada meeting, what are some of the things you'll be watching closely?
* Oh, there's some key data coming up. We have jobs numbers. We have more inflation data. And these are all key to what the Bank of Canada will consider in their next interest rate.
[AUDIO LOGO]
[MUSIC PLAYING]
