A panel of experts joined BNN Bloomberg on Wednesday to discuss the path forward for the Canadian economy after the Bank of Canada announced a third consecutive cut to its key interest rate.
The central bank cut its trend-setting overnight rate by 25 basis points (bps) Wednesday morning, bringing it to 4.25 per cent -- a move that was widely expected by economists.
“It’s an as-expected decision; we seem to be settling into a bit of an easing cycle,” Warren Lovely, chief rates strategist at National Bank Financial told BNN Bloomberg during the panel discussion.
In a press conference following the policy announcement, Bank of Canada Governor Tiff Macklem said the central bank is prepared to continue easing monetary policy as long as inflation continues its downward trend toward the bank’s two per cent target.
Lovely said the bank’s apparent willingness to continue cutting its key rate is “warranted” considering recent inflation data. Statistics Canada’s latest consumer price index (CPI) reading was 2.5 per cent in July.
“The inflation picture has becalmed, the economy does appear to have some downside risk; we don’t need restrictive interest rate policy anymore,” he said.
“Importantly, the Bank of Canada, soon, won’t be going alone. Other central banks are joining the fray and critically, the U.S. Federal Reserve will soon be easing as well.”
Bipan Rai, managing director of portfolio strategy at BMO Global Asset Management, said during the panel discussion that despite the central bank’s recent dovish tone shift, Macklem has made it clear that the bank is prepared to shift its strategy if the data changes.
“There’s still a heavy degree of reliance on what incoming data tells us,” he explained.
“If there are signs that things are becoming a little bit more… nefarious compared to the Bank of Canada’s expectations, then I do think that the market is going to price in more stimulative policy over the course of the cycle.”
Brompton Group CIO Laura Lau said in the discussion that it’s an appropriate time for the Bank of Canada to be easing monetary policy, as it’s clear that many of the world’s largest economies are showing signs of weakness.
“I think that it’s become very obvious, not just in Canada but in the U.S., Europe and China, that all economies are slowing down,” she said.
Lau noted that worries around rampant inflation have now given way to concerns about hampered economic growth, with central banks around the world hoping to engineer soft landings and keep their respective economies from receding.
Labour market
Lovely said that current data suggests the Bank of Canada is likely to continue easing rates at 25-basis-point intervals at every meeting going forward, adding that on the inflation front, he believes price stability has been “largely secured.”
“I think we’re almost there, so to me, what we really want to watch here very, very carefully is the labour market,” he said.
Rai agreed that the labour market is an economic component that needs to be paid close attention to going forward, especially considering that the rate of unemployment could continue to rise even if more jobs are created.
“The Canadian economy could still add jobs and still the labour market could show strain in the form of the higher unemployment rate as the participation rate increases,” Rai explained.
“That’s a sign that the labour market is struggling to absorb the flow of new entrants into the market. That’s something to alludes to the fact that slack has increased in the Canadian economy which is something that the bank has pointed out… that could impact markets.”
Investing environment
Lau said that even before the Bank of Canada’s policy announcement on Wednesday, interest rate-sensitive sectors of the stock market were seeing increased fund flows on anticipation of the rate cut.
“I think it’s already started. We’ve seen that with money market rates coming down, high interest savings accounts coming down, some of the yields on these dividend stocks are becoming very competitive,” she said.
“We’re starting to see that flow of funds in (to) telecoms, pipelines and banks. Some of these telecoms and pipelines are six or seven per cent yields, so especially with your dividend tax credit, you’re getting more than well-compensated for that extra risk in the equity market.”