The Bank of Canada should – and will – continue on a gradual path towards interest rate normalization
The Bank of Canada should – and will – continue on a gradual path towards interest rate normalization. That’s the opinion of Aubrey Basdeo, Managing Director, Head of Canadian Fixed Income at BlackRock, who describes the Canadian economic recovery as being “uneven”, and the underpinnings of future growth looking “less stable” than earlier this year.
Basdeo is in no doubt that the Bank of Canada wants to raise interest rates. Governor Stephen Poloz has been explicit in his aims. Following the July rate hike, Poloz said that notwithstanding “hypothetical scenarios” like the dissolution of NAFTA, “higher interest rates will be warranted to keep inflation near target.”
“The big question isn’t whether rates will rise; it’s when,” Basdeo says. “We think the BoC will continue on a very gradual path towards policy normalization for a few reasons.”
These reasons include a lack of employment pressure, market signals flashing yellow and inflation, which remains subdued. “July’s headline inflation number surprised to the upside, probably boosted by transitory price increases for travel and gasoline,” Basdeo says. “However, importantly, the core measures, an indication of the underlying inflation trends, were unchanged or up only marginally, averaging out at 2%.”
High levels of household debt are also a reason for Poloz and the Bank of Canada to proceed with caution. The average Canadian consumer now owes $1.70 for every dollar of disposable income, which Basdeo describes as being “extremely burdensome”.
“It’s creating a delicate balancing act for the Bank of Canada,” Basdeo says. “While some consumption growth braking is expected and even desired, overpatrolling rate increases could cause demand to slow too much, too fast, sending consumption into free fall.”
“Put it all together, and we believe that while the Bank of Canada’s path to normalization is well defined, it will remain gradual.”
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