cagkansayin
Transcript
Anthony Okolie: As expected, the Bank of Canada held its overnight rate steady at 5%. Joining me today to discuss is Elaine Lindhorst of TD Asset Management. And, Elaine, we’ll start off by asking, did anything stand out for you today?
Elaine Lindhorst: Well, Anthony, as you said, no interest rate change was expected. And we did not get one. So, really, the focus was on the communication. Also, the Bank of Canada today released their quarterly economic projections. So this is our chance to understand how they’ve incorporated the more recent data that’s not so supportive of interest rate cuts into their thinking.
What we saw today was that the bank continues to expect low growth in Q1 of this year, so near zero growth, until the middle of the year. And then they see the economy starting to strengthen, so this year and the year with just under 1% growth, next year growth just under 2.5%. The bank did acknowledge that consumers are adjusting their spending. So they’re responding to those higher interest rates.
The caveat, of course, is that inflation remains high. And that’s that more recent economic data we’ve had that’s not so supportive of the interest rate cuts. We’ve had core inflation at 3.7%. It increased in December. We also saw the wage growth increase up to 5.7%. So what the Bank of Canada called out was that core inflation this year, headline inflation, ended the year at 3.4%. And that’s higher than their target. And they stated that the path back to 2% inflation is going to be slow. And it won’t occur until 2025.
Anthony Okolie: OK, so we know what the Bank of Canada is telling us about core inflation. It continues to remain a problem. We know how they feel about the economy. What is the bond market telling us right now?
Elaine Lindhorst: So one of the takeaways from the communication today was on the discussion. And the discussion that the Bank of Canada had that they actually describe for us is that previously they had questioned if interest rates were high enough. But now they’re questioning how long interest rates will need to stay high.
So what the market is showing is that currently while consensus was that there would be no change today, the opinions vary as we go out. And some expect a cut in April. But overall, the first interest rate cut of a quarter of a percent is expected in June of this year and then 4 by the end of the year. So that suggests that by the end of this year, our overnight interest rate would have gone from 5% to 4%.
Anthony Okolie: OK, and what are some of the key metrics or things that you’ll be looking at closely over the next coming months to get a sense of what the Bank of Canada will do next?
Elaine Lindhorst: So when you think of the Bank of Canada, their mandate is price stability. So that’s inflation in the 1% to 3% range. From the bank’s perspective, they need to be certain that inflation is moderating, that they’re going back to target. And one of the metrics they look at is that core inflation number. Core inflation is important because it strips out the volatile components, and it leads headline inflation. So for the Bank of Canada to cut, they need to see consecutive readings of core inflation moderating back to target.
So from that perspective, it seems likely that the Bank of Canada could have their first rate cut later this year towards the middle. And then that moderated pace of cuts would be appropriate at that point.
Anthony Okolie: OK, so given that interest rates are still fairly high, in terms of the economy, do you believe that the Bank of Canada can achieve a soft landing while avoiding a recession?
Elaine Lindhorst: Well, Anthony, the bank today, opening remarks from the governor were that this is very hard. This is a very hard job. They are balancing the risks of overtightening and under-tightening the economy. So from the perspective of the economy, that’s key. How will the economic data unfold? Will our economy remain with positive, near zero, but positive growth? Or will it sharply enter recession? In that case, aggressive rate cuts would be warranted by the bank but not the base case at this point.
Anthony Okolie: Elaine, thanks for joining us.
Elaine Lindhorst: Watch the data.
Anthony Okolie: Exactly. Thank you.
Elaine Lindhorst: Thank you.
