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The Bank of Canada has raised its key interest rate again by another 25 bps to 5%, but warns the downward momentum in inflation could stall. Anthony Okolie speaks with Sam Chai, Portfolio Research Manager, TD Asset Management, about the latest decision and the outlook for rates going forward.
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[MUSIC PLAYING]
* As expected, the Bank of Canada raised its overnight rate 25 basis points to 5%. Joining me today to discuss the latest announcement is Sam Chai. He's Portfolio Research Manager with TD Asset Management. Sam, did anything stand out for you today?
* So maybe first some context, right? Coming into this meeting, the market has priced in roughly 2/3 of a chance of a hike. For us, our view-- it doesn't really differ very much from the market view, which is that we think that the hike is also quite a bit more likely than a pause.
* Consider that since the last meeting we had the May inflation print, which has basically been very strong. Core inflation, in particular, is above 3.5% and is showing some signs of stickiness there as well. If you look at our retail sales data, also very stellar. GDP number has also been above the Bank of Canada's forecast back in April.
* And finally, last week, we had the stellar job report as well and tripled market expectations. And so I think all those pieces really help cemented a Bank of Canada hike today.
* And you mentioned the impressive jobs report that we got last week. Do you think the Bank of Canada is done hikes for the rest of the year?
* So, I mean, I can see 5% being the peak rate in this hiking cycle. However, I would say that the risk is skewed to Bank of Canada having to deliver more. In their latest statement today, they have mentioned that they don't expect inflation to return to target until 2025. And so they're expecting inflation to remain well above their target from now to the end of next year.
* And so the narrative is really rates have to be staying higher for longer. And if inflation being more sticky than they expected or labor market being more resilient, then the likelihood is that they will have to deliver further tightening.
* And what has the market reaction been so far? I mean, what are money markets-- what are they pricing it in terms of further moves of the Bank of Canada's overnight rate?
* Right. So from now to the end of the year, there's roughly around 2/3 of a hike price in. And then obviously, there's no cuts. The first cut is priced in the first half of next year. And then in totality, we have roughly two to three cuts priced in 2024.
* OK. Now, of course, later this month we have the Fed's rate announcement. And today we had the latest US inflation print. What impact does this report have on the Fed's rate decision?
* Sure. So core-- US core inflation and headline inflation both surprise to a downside today. I think it's definitely welcoming news for the Fed. That being said, I think we need to put this into context, which is that year over year, core inflation is still roughly around 5%. It's way above the Fed's target. So I don't think today's inflation print will dissuade the Fed from delivering another hike later this month.
* That being said, I think if we look at from August onwards, considering leading indicator is showing core inflation may slow down further in the coming months, I think the question is probably not if but how much core inflation is going to slow down. And so I think the extent of that will determine whether the Fed needs to deliver further tightening from August and onwards.
* OK. And I'm going to pivot back to Canada.
* Sure.
* I'm going to talk a little bit about our population growth and what impact that is having on monetary policy. Because we know that we've brought in over a million new people to Canada, and that's having an impact on spending. So what impact will this have on Bank of Canada's effort to tame inflation?
* I think there are multiple factors to consider here. Higher population growth I think is definitely helpful for the growth front. On the other hand, it's also helping to address the imbalance in labor supplies. For instance, last week we see the unemployment rate rising to 5.4%, and that is also because of increased labor market force.
* More people are entering the labor market.
* Exactly. And so I think it's basically a balance factor. And the other thing is that generally with higher population growth is also basically going to be more bullish for housing prices. So I think there are different factors in play here. On net, I would think that probably tilting the Bank of Canada may need to deliver a bit more tightening than not.
* And what are the indicators that you'll be watching closely as the Bank of Canada considers its next move?
* Sure. I think the Bank of Canada has been very clear in terms of what they watch, and I'll put it into three categories. The first one is inflation, particularly core inflation. That is very important, and not just a year over year number, but also sequentially every month. Are we seeing sequential deceleration in month over month prints? That's a very key signal to watch.
* Wage growth obviously is also very important to see. In the last print, we see-- we have seen a moderation in wage growth. But do we see that trend continue? Also very important.
* On the growth front, we want to look at the GDP numbers, retail sales, which shows what's the health and the consumption component in the economy. And also, PMIs, which is a leading indicator to show what the growth outlook could be.
* Also, lastly, on the labor market front, we want to see if we see further weakness in labor market, and do we see further rise in unemployment rate-- also a key consideration for Bank of Canada.
* OK. And finally, where do you see the Canadian dollar going from here?
* Right. So post-today's announcement, dollar CAD-- US dollar versus Canadian dollar-- have actually fallen. Because today's bank of Canada rate hike is not fully priced in by the market. And so I think it's intuitive that the dollar CAD has sold off somewhat. And also, the inflation print today is also weak. So dollar cad sold off a bit more.
* But I think my view on dollar CAD is more range-bound. Because I think the Fed is likely going to deliver further tightening later this month as well. And so we are still going to have that rate divergence in place. So the Fed's policy rate will be meaningfully higher than the Bank of Canada policy rate. And that is a supportive factor for dollar CAD.
* One other consideration is that if both economies-- the US and Canada-- actually slow down significantly, that should benefit the US dollar as well, just giving the US dollar a safe haven currency status. Just something to consider.
* Sam, thank you very much for joining us.
* Thank you very much as well.
[MUSIC PLAYING]
* As expected, the Bank of Canada raised its overnight rate 25 basis points to 5%. Joining me today to discuss the latest announcement is Sam Chai. He's Portfolio Research Manager with TD Asset Management. Sam, did anything stand out for you today?
* So maybe first some context, right? Coming into this meeting, the market has priced in roughly 2/3 of a chance of a hike. For us, our view-- it doesn't really differ very much from the market view, which is that we think that the hike is also quite a bit more likely than a pause.
* Consider that since the last meeting we had the May inflation print, which has basically been very strong. Core inflation, in particular, is above 3.5% and is showing some signs of stickiness there as well. If you look at our retail sales data, also very stellar. GDP number has also been above the Bank of Canada's forecast back in April.
* And finally, last week, we had the stellar job report as well and tripled market expectations. And so I think all those pieces really help cemented a Bank of Canada hike today.
* And you mentioned the impressive jobs report that we got last week. Do you think the Bank of Canada is done hikes for the rest of the year?
* So, I mean, I can see 5% being the peak rate in this hiking cycle. However, I would say that the risk is skewed to Bank of Canada having to deliver more. In their latest statement today, they have mentioned that they don't expect inflation to return to target until 2025. And so they're expecting inflation to remain well above their target from now to the end of next year.
* And so the narrative is really rates have to be staying higher for longer. And if inflation being more sticky than they expected or labor market being more resilient, then the likelihood is that they will have to deliver further tightening.
* And what has the market reaction been so far? I mean, what are money markets-- what are they pricing it in terms of further moves of the Bank of Canada's overnight rate?
* Right. So from now to the end of the year, there's roughly around 2/3 of a hike price in. And then obviously, there's no cuts. The first cut is priced in the first half of next year. And then in totality, we have roughly two to three cuts priced in 2024.
* OK. Now, of course, later this month we have the Fed's rate announcement. And today we had the latest US inflation print. What impact does this report have on the Fed's rate decision?
* Sure. So core-- US core inflation and headline inflation both surprise to a downside today. I think it's definitely welcoming news for the Fed. That being said, I think we need to put this into context, which is that year over year, core inflation is still roughly around 5%. It's way above the Fed's target. So I don't think today's inflation print will dissuade the Fed from delivering another hike later this month.
* That being said, I think if we look at from August onwards, considering leading indicator is showing core inflation may slow down further in the coming months, I think the question is probably not if but how much core inflation is going to slow down. And so I think the extent of that will determine whether the Fed needs to deliver further tightening from August and onwards.
* OK. And I'm going to pivot back to Canada.
* Sure.
* I'm going to talk a little bit about our population growth and what impact that is having on monetary policy. Because we know that we've brought in over a million new people to Canada, and that's having an impact on spending. So what impact will this have on Bank of Canada's effort to tame inflation?
* I think there are multiple factors to consider here. Higher population growth I think is definitely helpful for the growth front. On the other hand, it's also helping to address the imbalance in labor supplies. For instance, last week we see the unemployment rate rising to 5.4%, and that is also because of increased labor market force.
* More people are entering the labor market.
* Exactly. And so I think it's basically a balance factor. And the other thing is that generally with higher population growth is also basically going to be more bullish for housing prices. So I think there are different factors in play here. On net, I would think that probably tilting the Bank of Canada may need to deliver a bit more tightening than not.
* And what are the indicators that you'll be watching closely as the Bank of Canada considers its next move?
* Sure. I think the Bank of Canada has been very clear in terms of what they watch, and I'll put it into three categories. The first one is inflation, particularly core inflation. That is very important, and not just a year over year number, but also sequentially every month. Are we seeing sequential deceleration in month over month prints? That's a very key signal to watch.
* Wage growth obviously is also very important to see. In the last print, we see-- we have seen a moderation in wage growth. But do we see that trend continue? Also very important.
* On the growth front, we want to look at the GDP numbers, retail sales, which shows what's the health and the consumption component in the economy. And also, PMIs, which is a leading indicator to show what the growth outlook could be.
* Also, lastly, on the labor market front, we want to see if we see further weakness in labor market, and do we see further rise in unemployment rate-- also a key consideration for Bank of Canada.
* OK. And finally, where do you see the Canadian dollar going from here?
* Right. So post-today's announcement, dollar CAD-- US dollar versus Canadian dollar-- have actually fallen. Because today's bank of Canada rate hike is not fully priced in by the market. And so I think it's intuitive that the dollar CAD has sold off somewhat. And also, the inflation print today is also weak. So dollar cad sold off a bit more.
* But I think my view on dollar CAD is more range-bound. Because I think the Fed is likely going to deliver further tightening later this month as well. And so we are still going to have that rate divergence in place. So the Fed's policy rate will be meaningfully higher than the Bank of Canada policy rate. And that is a supportive factor for dollar CAD.
* One other consideration is that if both economies-- the US and Canada-- actually slow down significantly, that should benefit the US dollar as well, just giving the US dollar a safe haven currency status. Just something to consider.
* Sam, thank you very much for joining us.
* Thank you very much as well.
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