FLCA - BOC Holds Key Rate Steady But 'Is Prepared' To Raise Rates Again If Needed

2023-03-09 16:51:00 ET

Summary

• Is the Bank of Canada done rate hikes in 2023?
• What are the implications of Fed Chair Powell's comments on BoC rate policy?
• What impact could the divergence between BoC and Fed rates have on the loonie?

The Bank of Canada keeps its key policy rate unchanged at 4.5%, but is leaving the door open to further rate hikes to tame inflation. Anthony Okolie speaks with Elaine Lindhorst, Senior Portfolio Manager, Active Fixed Income, TD Asset Management, about the implications for Canada’s economy.

Transcript

Anthony Okolie: As expected, the Bank of Canada kept its key overnight rates steady at 4.5% after eight consecutive rate hikes. Joining me today to discuss the latest Bank of Canada rate decision is Elaine Lindhorst. She's a senior portfolio manager of active fixed income with TD Asset Management. Elaine, I'm going to ask you, did anything set out for you today?

Elaine Lindhorst: Well, Anthony, as you mentioned, they left the interest rate on hold, and that was expected first time in a year. So the focus was absolutely on the communication. As you recall in January at their last policy meeting, they stated that they expected to be on hold, but this was conditional. So it's conditional on how the data unfolds and whether it is in line with their projections. So absolutely, when you look at the communication, it was notable for the conciseness of the communication and the unchanged nature of the communication. So bottom line, the latest data as per the Bank of Canada is in line with their expectations.

Anthony Okolie: And do you think the Bank of Canada is done with rate hikes for now? Because as we know, increasingly traders are pricing in a potential rate hike later this year.

Elaine Lindhorst: Well, when you look at the near term, Anthony, it does appear that they are most likely on hold at this point. We can't underline the importance of data enough, though. They have reiterated that should they need to raise interest rates as data unfolds, they will.

Anthony Okolie: Now, given that the Fed is now open to larger and faster rate hikes, where does this leave Bank of Canada rate policy?

Elaine Lindhorst: So when you consider these two central banks, they both face the same inflationary challenges, and they've both responded very closely. They both had aggressive interest rate hikes. And for the most part until now, the pace and the overall interest rate level for the banks has been similar, but we are seeing that divergence. And when you consider the economies, our inflation here in Canada peaked at a lower level. And most importantly, the interest rate sensitivity of our economy is different. So our Canadians, we are extremely leveraged, and that will affect how these central banks need to act going forward.

Anthony Okolie: And if we do see this divergence or this gap in policy rates increasing, what impact will that have on the loonie? And, potentially, what does that mean for inflation in Canada as well?

Elaine Lindhorst: So obviously, a key consideration. And when you look at the US, they are our main trading partner, we are a trading nation, and we have a flexible interest rate regime. So what this means that should inflation warrant higher interest rates for the Federal Reserve, that would put pressure on the Canadian dollar, and in turn our imports would become more expensive. So absolutely an inflationary dynamic and one to consider as we look forward.

Anthony Okolie: Okay. So looking forward, beyond inflation and recession worries, what do you think are the biggest risks right now to the Bank of Canada's outlook?

Elaine Lindhorst: So when you consider where the Bank of Canada is coming from, their consideration, their goal is low and stable inflation. We have not achieved that yet. So from the bank's perspective, the risk is that our economy does not unfold, that inflation does not moderate to the point that we have that low, stable inflation. And low and stable inflation, that's key. That's key for economies as a whole, but for the consumer, specifically for businesses. So until the bank reaches that low and stable inflationary point, that will be their key concern or risk.

Anthony Okolie: Elaine, thank you very much for your time.

Elaine Lindhorst: Thank you, Anthony.

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