BoC holds policy rate, cuts growth outlook
Sadiq S. Adatia
Opinions as of January 20, 2016
The Bank of Canada has decided the country's faltering economy doesn't need another boost from even lower interest rates... at least for now.
The consensus view leading up to today's no-change rate decision was fairly evenly split between those who thought the central bank would cut the overnight lending rate for the third time in 12 months, and those who thought the BoC would hold the line.
Here's what policymakers at the central bank have to say about current conditions:
"Prices for oil and other commodities have declined further and this represents a setback for the Canadian economy... The Bank now expects the economy's return to above-potential growth to be delayed until the second quarter of 2016."
Even though the BoC has judged current monetary policy to be "appropriate," it does note "financial vulnerabilities continue to edge higher, as expected." Accordingly, the central bank cut its growth outlook for the year.
Our view is that a rate cut would have been a good idea.
A weak domestic economy and a downtrending stock market have been a large part of our forecast for the better part of almost four years. Granted – the depths to which the price of oil has gone have been darker than what we'd expected, but the overall fallout is the same: tough times today, tough times to come. This has been one of the main reasons we have been warning investors about having too much allocated to Canadian equities.
We are however growing more bullish on oil, but we don't expect much in the way of gains until later this year. Current prices just make production of new oil unprofitable, resulting in supply diminishing faster (even with oil from Iran becoming available).
Canadian bond values rose in the days leading up to the decision, which played nicely into our forecast. In general, we've been calling for domestic bonds to outperform their global counterparts for over a year.
At this point it's going to take more than ultra-low interest rates to move the needle on the Canadian economy anyway. We look forward to seeing the Liberal government's spending plan when the budget is tabled sometime in the next few weeks, when we're likely to learn the details of Ottawa's commitment on infrastructure improvement.
Significant stock volatility due to global growth concerns (read: China) has taken a bite out of the equity markets. We expect volatility to be a year-long theme – sometimes in the foreground and sometimes in the background – but always in the mix.
Despite some weaker-than-expected economic data from the U.S., we believe that economy remains on solid ground, and that the U.S. equity market continues to be a better alternative to Canada's. We still prefer international equities however to both regions.
Even though the central bank held the line today, it's important to consider the impact of monetary policy decisions on investment portfolios – particularly since the U.S. Federal Reserve raised its own policy rate in December.
Different policies can have different effects on regional capital markets. The ability to thoughtfully navigate investment opportunities and risks by asset class and region becomes more critical when there is no one rising tide to "lift all boats" (or a receding tide to beach them). This is not new – we've been in this mixed policy environment for a few years. But the degree of divergence is growing more pronounced, and with it the uneven pace of global economic growth.
The bottom line is that asset class return profiles can be significantly affected by monetary policy, and when policies change and diverge, appropriate diversification becomes increasingly challenging – but also increasingly important.
© Sun Life Global Investments (Canada) Inc., 2016. Sun Life Global Investments (Canada) Inc. is a member of the Sun Life Financial group of companies.