Bank of Canada hikes bank rate by a quarter percentage point to 1.75 per cent as the USMCA has taken a big risk to the economy off the table. The question that remains, is how fast and how high will Bank of Canada take rates in the coming year. Kim Parlee talks with Michael Craig, Senior Portfolio Manager, TD Asset Management.
Mm-hmm. Yeah, well, I think the market came in thinking that they had to be really hawkish for the current level of the currency to be supported. And I think broadly speaking, they were saying going across the economy, they mentioned that the household risks were abating somewhat, that the production sector of the economy was looking good, certainly with the resolution of the trade talks. That was a good news story.
And broadly speaking, they also referenced the investment in natural gas in BC as being another positive for the Canadian economy. So broadly speaking, a good statement. It actually dialed down expectations for inflation next year, growth around 2%. So nothing crazy. Not barn-burning growth but stable growth. And the markets reacted accordingly.
Yeah, we saw the loonie, initially, at least, rally up about half a cent on this. And then, we'll have to see where it goes from here. But do you think this is a temporary move in the loonie? What do you think of what happened today and why, and where do you think it's going?
In going into the end of the year, a bit more bullish in the loonies, particularly against the crosses. So percents, perhaps a cent or two against the dollar but certainly looks a lot better versus the euro sterling or sterling. So a good news story for the loonie. Canadian stock market didn't like it too much. The stock market was off a fair chunk, about, I'd call, 100 basis points. And so you can see that the broader market isn't necessarily as comfortable with higher rates as perhaps the economy is.
You mentioned we heard that they talked about the housing market stabilizing, vulnerabilities edging lower. They did mention as well-- that I thought was interesting-- that there was a loss of investment competitiveness due to US tax reforms and uncertainty with global trade policy, and that shaves a bit of the export growth off in the longer term. I think that was a small mention but probably notable for Canadian business.
Yeah, so these are things that are going to matter in 2019, 2020. So whether the short term looks OK, going into 2019, I think I'd be a little bit more cautious. I don't think we're going to see much more than one more hike coming out of the bank. And I think by the middle of next year, it'll probably be a bit more of a challenging story.
That's interesting, because-- well, my last question for you. They talk about the fact that they want to move to neutral stance. I mean, they're 1 and 3/4 right now. What is neutral stance? I mean, is it 2 and 1/2% to 3%, or where do you see that?
Yeah, this is always when you get people saying, well, on one hand, on the other hand. Neutral is anywhere between 2% and 3%. I would say it's probably in the middle of the range. And so now we're at 1.75% That would indicate a few more hikes. I'm just not certain we're going to get there before the global economy starts to darken somewhat. You've already heard the IMF warn of downgrades of the global economy. And now some of the things that we put off-- geopolitical risks, tariff wars, et cetera-- those things are, I think, going to come to be much more to the forefront in 2019.
Michael, thanks very much.
Thank you for having me.