Show Transcript
The Bank of Canada kept its key policy rate unchanged, and sees the economy picking up steam in 2021. Anthony Okolie speaks with James Orlando, Senior Economist, TD Bank, about whether markets have begun pricing in a faster economic recovery, higher inflation and sooner-than-expected rate hikes.
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- The Bank of Canada kept its overnight rate steady at 0.25%, and pledged to keep rates on hold through 2023. James, did anything stand out for you today?
- Yeah, absolutely. The Bank of Canada has upgraded its economic growth outlook. They've talked about how, especially during this second wave of COVID-19 infections, how the Canadian economy has been incredibly resilient. Remember, not too long ago, it was expected that, due to the second COVID wave, we were going to have negative GDP growth during this first quarter.
And now, with the recent economic data, some of the high-frequency data that are coming in, we're looking to see that, during this entire time period of the second wave, every single month, we're going to have positive GDP growth. And that's just astonishing. It's astonishing that we, as Canadians, as people, as businesses, we've been so resilient during this time period. So it's being reflected by the Bank of Canada in their upgraded outlook.
- And what about this massive US fiscal stimulus package? Do you see any impacts on Bank of Canada policy in the near-term?
- Yeah, so the US $1.9 trillion package, that is definitely going to lift US economic growth. It positions Americans in a better way going forwards. It means the economic rebound in the US is going to be stronger than previously thought. And it's important for Canada because the US is the largest trading partner of Canada. And so the better the US is doing, the better our exports are doing. So there's definitely relationships between a stronger US economy and how that passes through to Canada. So we view that as definitely an incremental positive for the Canadian economy and our outlook.
- James, you and I have talked about rising bond yields here in Canada and the US in the past. How likely is it that the Bank of Canada can continue to maintain this lower for longer rate policy?
- Yeah, so you're absolutely right. Bond yields in Canada, the US, and around the world have started to rise with this economic recovery that we're seeing. And the rising bond yields is a byproduct of this recovery. It happens during every recession. You know, during the recession, at the beginning, bond yields drop really low. And as the recovery starts building momentum, you start seeing longer-term yields rise.
And so this is very typical. We expect it to continue. The Bank of Canada and other central banks actually have not commented too much on this rising bond yield environment and the impact it will have on economic growth. We do know that, for example, look at mortgage rates right now in Canada. Mortgage rates had gone down very low, to historically low levels, and started ticking up over the last little bit of time.
Now, they've increased to a level that is not going to be economically restrictive. It's not going to cool this hot housing market, but it might slow it to some smaller degree than we had before. And this is all on the margin right now.
So I don't think the Bank of Canada is saying that bond yields are higher, and so we need to change our policy. I think they're saying that, as the recovery keeps going along, bond yields should be a little bit higher. We think they could continue rise over the next few months, but we don't think it's going to get to a level that's going to really cramp this economic recovery that we're seeing going on right now.
- And where do you see the loonie going in the next little while? We've certainly heard about strong commodity markets. Is that going to have an impact on the dollar?
- Yeah, definitely. So the loonie has done extremely well based on the fact that commodity prices-- so we're talking about non-energy commodities-- have done extremely well due to the manufacturing boom. And now, we're starting to see energy prices really starting to push higher. And all this should continue, right? So energy prices are tied to mobility. If we're traveling more, if we're flying in airplanes, we're driving our cars more, that causes demand for energy prices, pushes energy prices up, and causes increased demand for the Canadian dollar, as well.
And not to mention, we're talking a lot about the Bank of Canada here, and the Bank of Canada most likely is going to be able to raise its policy rates within the next two to three years. And that's starting to be priced into higher bond yields. And Canadian yields have gone up tremendously relative to yields in other countries.
And so it's not just the commodities story anymore. We're starting to see interest rates and demand from foreign investors wanting to capture that extra yield. So they're looking into the Canadian market and seeing higher yields than they can get in other countries, and they're trying to capture that yield. They're trying to gain that extra yield differential that they can get in Canada. So when you buy a Canadian bond, you've got to buy Canadian dollars. And that causes demand for Canadian dollars as a result. So all of this is moving in the direction of a strong Canadian dollar.
- So bottom line, James, what should investors take from this announcement today?
- So I think what investors need to take from this whole announcement is that the Bank of Canada is acknowledging that the recovery is doing better than they initially thought. Economic growth is rebounding. The second wave of COVID-19 infections has not impacted the Canadian economy as much as feared. And as a result, the recovery is looking good. The 2021-2022 outlook is looking great. And we're just going to keep moving in a more positive direction.
You know, we're not out of the woods yet. We still have high unemployment rate in Canada. But this cementing of this recovery, and as we keep moving along, should continue to improve that outlook, and it should continue to cause bond yields to continue to rise, probably towards the 2% level over the next one to two years.
- James, thank you very much for your time.
- Thank you.
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- The Bank of Canada kept its overnight rate steady at 0.25%, and pledged to keep rates on hold through 2023. James, did anything stand out for you today?
- Yeah, absolutely. The Bank of Canada has upgraded its economic growth outlook. They've talked about how, especially during this second wave of COVID-19 infections, how the Canadian economy has been incredibly resilient. Remember, not too long ago, it was expected that, due to the second COVID wave, we were going to have negative GDP growth during this first quarter.
And now, with the recent economic data, some of the high-frequency data that are coming in, we're looking to see that, during this entire time period of the second wave, every single month, we're going to have positive GDP growth. And that's just astonishing. It's astonishing that we, as Canadians, as people, as businesses, we've been so resilient during this time period. So it's being reflected by the Bank of Canada in their upgraded outlook.
- And what about this massive US fiscal stimulus package? Do you see any impacts on Bank of Canada policy in the near-term?
- Yeah, so the US $1.9 trillion package, that is definitely going to lift US economic growth. It positions Americans in a better way going forwards. It means the economic rebound in the US is going to be stronger than previously thought. And it's important for Canada because the US is the largest trading partner of Canada. And so the better the US is doing, the better our exports are doing. So there's definitely relationships between a stronger US economy and how that passes through to Canada. So we view that as definitely an incremental positive for the Canadian economy and our outlook.
- James, you and I have talked about rising bond yields here in Canada and the US in the past. How likely is it that the Bank of Canada can continue to maintain this lower for longer rate policy?
- Yeah, so you're absolutely right. Bond yields in Canada, the US, and around the world have started to rise with this economic recovery that we're seeing. And the rising bond yields is a byproduct of this recovery. It happens during every recession. You know, during the recession, at the beginning, bond yields drop really low. And as the recovery starts building momentum, you start seeing longer-term yields rise.
And so this is very typical. We expect it to continue. The Bank of Canada and other central banks actually have not commented too much on this rising bond yield environment and the impact it will have on economic growth. We do know that, for example, look at mortgage rates right now in Canada. Mortgage rates had gone down very low, to historically low levels, and started ticking up over the last little bit of time.
Now, they've increased to a level that is not going to be economically restrictive. It's not going to cool this hot housing market, but it might slow it to some smaller degree than we had before. And this is all on the margin right now.
So I don't think the Bank of Canada is saying that bond yields are higher, and so we need to change our policy. I think they're saying that, as the recovery keeps going along, bond yields should be a little bit higher. We think they could continue rise over the next few months, but we don't think it's going to get to a level that's going to really cramp this economic recovery that we're seeing going on right now.
- And where do you see the loonie going in the next little while? We've certainly heard about strong commodity markets. Is that going to have an impact on the dollar?
- Yeah, definitely. So the loonie has done extremely well based on the fact that commodity prices-- so we're talking about non-energy commodities-- have done extremely well due to the manufacturing boom. And now, we're starting to see energy prices really starting to push higher. And all this should continue, right? So energy prices are tied to mobility. If we're traveling more, if we're flying in airplanes, we're driving our cars more, that causes demand for energy prices, pushes energy prices up, and causes increased demand for the Canadian dollar, as well.
And not to mention, we're talking a lot about the Bank of Canada here, and the Bank of Canada most likely is going to be able to raise its policy rates within the next two to three years. And that's starting to be priced into higher bond yields. And Canadian yields have gone up tremendously relative to yields in other countries.
And so it's not just the commodities story anymore. We're starting to see interest rates and demand from foreign investors wanting to capture that extra yield. So they're looking into the Canadian market and seeing higher yields than they can get in other countries, and they're trying to capture that yield. They're trying to gain that extra yield differential that they can get in Canada. So when you buy a Canadian bond, you've got to buy Canadian dollars. And that causes demand for Canadian dollars as a result. So all of this is moving in the direction of a strong Canadian dollar.
- So bottom line, James, what should investors take from this announcement today?
- So I think what investors need to take from this whole announcement is that the Bank of Canada is acknowledging that the recovery is doing better than they initially thought. Economic growth is rebounding. The second wave of COVID-19 infections has not impacted the Canadian economy as much as feared. And as a result, the recovery is looking good. The 2021-2022 outlook is looking great. And we're just going to keep moving in a more positive direction.
You know, we're not out of the woods yet. We still have high unemployment rate in Canada. But this cementing of this recovery, and as we keep moving along, should continue to improve that outlook, and it should continue to cause bond yields to continue to rise, probably towards the 2% level over the next one to two years.
- James, thank you very much for your time.
- Thank you.
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