Chief investment officer praises BoC’s transparency despite long shadow of NAFTA
An October 24 rate hike now looks odds-on despite the “huge overhang” of NAFTA.
The Bank of Canada, as expected, kept its benchmark interest rate at 1.5% on Wednesday, citing the transitory nature of inflation – it reached 3% in July – sturdy economic data and the stabilizing of the housing market.
Rob Edel, chief investment officer at Nicola Wealth Management, is a little more bearish on the figures but said the bank had done a decent job at being transparent and not surprising the market.
He said: “I think all the central banks want to bring rates up. They want to normalize, so they are looking for an opportunity to do that.
“Talking about how strong the economy is, maybe at the margins that surprised me a little bit. Full employment or full capacity could suggest they may be a little more aggressive whereas I’d look at Canada being strong because of the stronger US economy.
“But I do worry about the higher debt levels in Canada and the concern if they raised rates too quickly.”
Edel said that, despite the bank reporting household debt was down, it still represents a long-term headwind for the Canadian dollar and interest rates.
Governor Stephen Poloz is, though, sticking to his plan, and the message was clear that rates will continue to increase, with another hike likely next month.
“They want to be pretty transparent,” he said. “What could derail that? I guess if you have a real downturn in the economy or there is an issue with NAFTA and what happens with trade … so they’ve left themselves an out with that.
“They would like to raise rates and I think the Fed will raise rates maybe twice so if they do one, I think that be appropriate.”
While Edel believes the political manoeuvrings of the trade negotiations with the US have little impact on Canadian investors, he concedes it is a distraction, albeit one that makes no sense given the two countries’ integrated economies.
He said: “I think it’s huge overhang. How real is it? It’s hard to know. Maybe if someone just steals another letter off Trump’s desk it will go away!
“Our view is that it doesn’t make sense so common sense will prevail. We are still optimistic something gets done.”
Other than some volatility in the Canada market and auto stocks, Edel believes investors would be better off looking at other indicators to guide their decision-making.
He said: “It’s interesting, if you look at the US markets and what’s really important, which is a trade war with China, you see some things in certain industries but overall the markets have looked through it. Really, it’s the strength of the economy and corporate earnings that are driving the market.”
