Bank of Canada holds rates steady
Balances a maturing economic expansion with weakness in housing and exports
By: SLGI Portfolio Management team
As broadly expected by the market, the Bank of Canada held its key overnight lending rate steady at 1.25%. The BoC, facing mixed incoming data and a slowing economy, trimmed its 2018 growth forecast from 2.2% in January to 2% in today’s Monetary Policy Report. It also increased its estimate of the economy’s potential output, suggesting the BoC may raise interest rates at a slower pace than previously thought.
Consumers have been the main driver of recent economic growth. However, they now face slowing appreciation in house prices, and the cost of servicing historically high personal debt levels is increasing. While the overall unemployment rate remains at 5.8%, a 40-year low, job growth over the last three months has been negative, albeit offset by some modest acceleration in wage growth. This growth was supported by increases in provincial minimum wages, and it remains to be seen whether it persists.
As household consumption slows, the focus is shifting to other areas of the economy for support. On the fiscal side, upcoming provincial elections may come with generous spending proposals to win voters, but the 2018 federal budget was largely absent of any meaningful tax or spending measures. This is important to note given the recent tax reforms in the U.S., which included a sharp reduction in corporate tax rates. And while the BoC’s Spring 2018 Business Outlook Survey suggests continuing positive business sentiment, it also pointed to reduced competitiveness, as well as the tax and regulatory environment, as factors holding back sales expectations and investment intentions.
At the same time companies continue to face ongoing uncertainty on the trade front. Initial indications, suggesting that a resolution of the NAFTA renegotiations was near have come and gone. The next deadline appears to be May 1, when an earlier exemption on steel and aluminum tariffs is set to expire. In the meantime, recent data shows that exports are performing below expectations, particularly in the non-commodity categories.
Recent remarks by the U.S. President that “there is no NAFTA timeline” appear to put pressure back on to Canada and Mexico to offer up concessions. However, we have not seen much progress on a number of contentious issues, including government procurement, dispute resolution, supply management and U.S. demands for a sunset clause.
With strong “America First” undercurrents stretching from trade to national security, it is difficult to see many bright spots for Canada and Mexico on this front. In the meantime, concern shifts back to the potential impact on investment, where companies may defer larger capital expenditures in light of this uncertainty.
It’s against this backdrop that we are maintaining a modest bias to equity markets outside of Canada across the Sun Life Granite Portfolios, and to higher-quality bonds within our fixed income holdings. Moreover, with higher market volatility we favor active management and continue to monitor and proactively adjust overall exposures. In this way, we look for opportunities to potentially enhance returns while managing overall risk.
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@ Sun Life Global Investments (Canada) Inc., 2018. Sun Life Global Investments (Canada) Inc. is a member of the Sun Life Financial group of companies.