Wesley Blight
September 4, 2024
Key takeaways
- The Bank of Canada cut its policy interest rate to 4.25%; expect additional cuts this year.
- While inflation is easing, growth appears soft and labour markets continue to slow.
- In portfolios with a tactical asset allocation overlay, we moved to a more defensive stance; we are relatively underweight equities.
While pointing out that inflation has continued to ease, the Bank of Canada (BoC) reduced its policy interest rate by an additional 0.25% at its September monetary policy meeting. This brings the target for the overnight rate to 4.25% following the BoCs third consecutive rate cut decision.
Inflation continues to ease, but other concerns arise in Canada
Progress towards the BoCs 2% inflation target continues to be made. “Inflation slowed further to 2.5% in July. The Bank’s preferred measures of core inflation averaged around 2.5% and the share of components of the consumer price index growing above 3% is roughly at its historical norms,” said the Bank.
We still expect the path of inflation moderation to be uneven. In Canada, excess supply (potential output is growing faster than actual growth) is an easing factor, while elevated prices in parts of the economy, namely housing and services, continue to be inflationary factors.
While second quarter Canadian growth is ahead of the Bank’s July forecast, preliminary readings suggest that economic growth in the third quarter will be behind projections. Labour markets also continue to stall.
We continue to expect further easing
This view is supported by weakened economic growth, inflation falling in line with the Bank’s own projections, and a labour market where job gains aren’t keeping pace with labour force growth. With two more meetings scheduled for 2024, further cuts are likely as the target policy rate is repositioned towards neutral (estimated by the BoC to be in the range of 2.25-to-3.25%).
However, the pace and magnitude of future cuts continues to depend on U.S. Federal Reserve (Fed) actions – to prevent the interest rate differential from getting too wide and putting additional pressure on the Canadian dollar. For reference the target for the federal funds rate is currently 5.25-to-5.5%. While the Fed does not face the same urgency to cut rates given the resiliency of the U.S. economy, it is expected to cut later this month (September 18th).
Being a bit more defensive
Despite recent volatility, stock markets remain up and financial conditions remain relatively easy. We took the opportunity to enter a more defensive stance in portfolios with a tactical asset allocation overlay given the disconnect between the stock market and the trend in the economy. Since early August, we have been tactically underweight equities relative to fixed income and cash.
The BoC’s next interest rate announcement is scheduled for October 23rd and will be accompanied by a Monetary Policy Report – its latest outlook for inflation and the economy.
Wesley Blight
Wesley Blight, CFA, CIM, FCSI, is a Portfolio Manager with the Multi-Asset Management Team of Scotia Global Asset Management. He is responsible for private asset and multi-asset portfolio solutions.
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