Bank of Canada wise to hold the line on interest rates, says PM

Invesco fixed income expert pleased central bank took a less hawkish stance than many anticipated

Bank of Canada wise to hold the line on interest rates, says PM

Avi Hooper, who recently returned to Canada as senior portfolio manager with Invesco after working abroad for 20 years, was pleased the Bank of Canada took a less hawkish view than markets anticipated at yesterday’s interest-rate announcement.

“Overall, it was in line with our expectation,” he said of the central bank’s decision to cut its expectations for economic growth this year as it held the line on its 0.25 per cent benchmark rate. He noted the markets were also rallying after the decision was announced.

“Going into this, the markets had priced the first rate hike for April of next year. We pushed back against that,” Hooper said during a phone interview. “It’s great to see the predictability of the Bank of Canada’s communication. It’s not something we’ve always seen from previous governors, but that’s something, from a market confidence perspective, that we were really pleased to see.”

Hooper, who hails from Vancouver, returned to Canada at the end of last year after working in London, England, and Atlanta, Georgia. Invesco has been looking at Canada from a global fixed income investor perspective and Hooper supported the bank’s latest decision.

“The market was coming in with this expectation that maybe the bank would be more hawkish in validating the market’s view of rate hikes next year. Instead, it took a more neutral line," he said. "In his press conference, [governor] Tiff Macklem certainly had every reason to be more optimistic with a high vaccination rate and the connectivity between employers and employees through government programs. There’s lots of reasons for optimism as we reopen the domestic economy.

"That said, Tiff Macklem clearly is working in a global economy that still faces health risks from the variants and, most importantly, the trajectory of the U.S. economy – and that’s one thing that not only the U.S. economy, but also the Canadian economy faces. In terms of risk, the markets have been very focused on inflation.”

While optimistic about long-term potential growth, Invesco acknowledges the pandemic will have an impact in the short to medium term. However, he felt the central bank recognized that since the growth is being cooled by inflationary pressures, especially since the supply side has been hampered, that represented something outside of its control.

“If you’re a central bank governor, like Tiff Macklem, the last thing you want to do is push against transitory or supply-side forced inflationary pressures,” said Hooper. “So, we’re really pleased that he’s taken a less hawkish view than the market anticipated, but one that stays [within] that neutral line of predictability. The market’s reaction, in our view, is also appropriate, where we’ve seen a bit of a rally in fixed income.”

Hooper and Invesco have been studying Canada’s fixed income relative to other developed bond markets. The Canadian and American bond markets are doing better than Japanese and European ones, which are stuck at zero growth.  

“We’ve actually seen Canadian fixed income as a source of opportunity, as attractive valuation, even for our global fixed income strategies,” he said. “So, given that our Canadian fixed income yield hasn’t earned out the highest in the G10, we continue to see it as an opportunity for global income investors.”

What Invesco finds even more attractive than the government portion of the market is the corporate bond market.

“By keeping monetary conditions so accommodating and allowing the economy to recover, this continues to help corporate balance sheets,” said Hooper. As for improving earnings with very accommodating policies, Invesco sees the bank continuing to be very supportive of corporate debt in Canada. “So, yes, we like Canadian fixed income. But, if we just go down one level, we particularly like the opportunities in the corporate bond market here.”

While Hooper expects the future growth level to be lower than it has historically been, since that’s been the recent trend, he noted that will also hamper the Bank of Canada’s ability to raise its rates meaningfully in the future. But, he added, the low yields are “still much more attractive than where the European or Japanese investors have to invest in their domestic markets". So, Invesco expects foreign investors will continue to find Canadian fixed income markets an attractive place for them to invest their fixed income allocations.

Wrapping up, Hooper said that given how well the Canadian government and public health system protected Canadians’ health during the pandemic, Canada is in a great position to recover, and he hopes there will be quicker growth in the future.  But, Canada is just part of the global economy, so its policies need to reflect those of its largest trading partners, and he was relieved that the Bank of Canada didn’t raise its interest rates before the U.S. Federal Reserve. He also doesn’t expect either to raise them in the near future.

In true Canadian style, he reflected, “slow and steady, we think, wins the race.”