Mark Dufresne
The Bank of Canada kept its key policy rate unchanged at 5%. The central bank said it was starting to see the economic conditions needed to lower interest rates but was looking for more evidence that the momentum could be sustained. continued. Hafiz Noordin, Vice President and Director of Active Fixed Income Portfolio Management at TD Asset Management, discusses the decision and its impact on the market with Greg Bonnell.
transcript
Greg Bonnell – The Bank of Canada kept its policy rate unchanged at 5%. But it shows they are getting closer to a rate cut and just need more evidence of slowing inflation. Hafiz Noordin, vice president and director of active fixed income portfolio management at TD Asset Management, joins me now to react. Hafiz, nice to meet you.
Hafiz Nouddin – It’s great to be here.
Greg Bonnell – immediately At the top, I want to ask you, how do you read the news that we’re getting from the Bank of Canada today? Are they going to schedule us for cuts as early as June or July?
Hafiz Nouddin – Yeah, I think they just want to keep the option still on the table in June. But in the words of Governor McCollum at a press conference, he was asked, is that possible? Is June possible? He said, yes, yes. So I think from that perspective, June is now becoming less and less likely compared to what’s going on in the United States, and that divergence seems to be emerging now.
Greg Bonnell – Yes. Now, I want to look at the statement from the prepared remarks. Obviously, this is also a very interesting question. Is June on the table? Well, it’s possible. Need to feel reassured. This is not just a temporary drop in inflationary pressures. Continued progress is needed in this area. So we’re only weeks, months away from next time. What do they need to see? What keeps them on track?
Hafiz Nouddin – Well, I think the two trends that are helping them lead to the start of a rate cut cycle are deflationary trends. So we’ve seen CPI fall to just under 3% year-over-year. Our headline growth was 2.8% year-over-year and our core growth was approximately 3.2%. But the key is that it’s trending downward. If this continues, then by the June meeting we may be at around 2.5%, pretty close to 2%.
However, another trend is in the labor market. So we now see the unemployment rate rising to 6.1%. So the trend there is pretty clear. So as long as we see unemployment staying where it is now and not falling back below 6%, then I think they can feel confident moving away from this most restrictive policy level.
Greg Bonnell – In addition to the well-known risks that we face, even as investors, apart from interest rate decisions, geopolitical conflicts and what that might mean for shipping routes, I do find it interesting that the Bank of Canada has said that we think the economy will stand Keep your footing. But at the same time, as the economy grows, we will bring inflation back down. It seems like a balancing act to me, right?
Hafiz Nouddin – This is. It felt like a Goldilocks environment they were planning. It’s interesting. They did upgrade their 2024 growth numbers. In January, they expected the figure to be below 1%. Now they expect GDP to grow 1.5% this year because, as we’ve discussed, global growth looks good.
So it feels a little bit Goldilocks, we’re upgrading the growth numbers, but we’re saying, yes, inflation is still going to come down. So I think that’s where we have to see the data come into play. Is it true that Canada is in an environment where we don’t have as strong a demand as the U.S. and can more easily hit our inflation targets?
We must always be guided by what is happening in America. It does appear that falling inflation while growth remains resilient is a more difficult story.
Greg Bonnell – Well, I’m glad you’re bringing America back into the conversation because you’ve hinted at it before. If there’s a chance that the country will cut interest rates in June or July, but it’s increasingly unlikely — and we’re going to see that from the Fed when we start talking about central bank disagreements — then what happens?
Hafiz Nouddin – Well, this could become a reality. Some of this is already built into the price. We see that when you look at Canadian and U.S. 10-year Treasury yields, there’s now about an 85 basis point difference, which is a historically large difference. Yields are higher in the U.S. because U.S. growth is stronger. As far as interest rates go, they may have to stay higher for longer.
Likewise, you can use currency as a guide. We’re seeing the US dollar strengthen against the Canadian dollar today, which suggests the Canadian economy won’t be as strong and may have to cut interest rates while the Fed remains on hold. So I think this bifurcated narrative is already starting to play out, but with what we’re seeing today, it’s likely to accelerate.
Greg Bonnell – Let’s talk about currency trading because based on what we have, the US inflation data came in higher than expected and then the Bank of Canada said June was on the cards and we saw the Canadian dollar weaken. Ultimately, if central bank disagreements persist throughout the year and the Canadian dollar weakens, are we in danger of imported inflation? We got a lot of things from America.
Hafiz Nouddin – This is a good point. I think the really difficult balancing act is that, on the one hand, without worrying about inflation, currency depreciation tends to be a good thing because your exports become cheaper, which tends to stimulate domestic demand. But the main concern remains inflation.
I think this is where the Bank of Canada can’t just look at its own data alone. It has to look at what’s happening in America. Even if they can start thinking about the timing and magnitude of cuts, they can’t be too aggressive because then currencies could become truly misaligned and cause big swings in financial markets.
Greg Bonnell – The last thing I want to ask is, our federal budget is less than a week away. I think, in terms of that document, the Bank of Canada probably doesn’t want to see any big spending that would cause inflation. Is this the danger? Or do we have a feeling this budget won’t be a big expense?
Hafiz Nouddin – Well, you always have to worry when you go into an election period and we’ll be thinking about that next year. So the concern is, will we see spending that will lead to inflation but not deliver benefits? Spending to increase the economy’s productive capacity is okay. I think that’s the main – should be the main focus. But if the concern is that it’s more stimulative but doesn’t actually add to the supply side of the economy, then inflation concerns may come into play.
So I think the Bank of Canada is already projecting GDP growth of 1.5% this year and we shouldn’t see any growth – there doesn’t seem to be a need for more fiscal stimulus. But it’s definitely a risk. I think that’s why they need this option. Let’s get through next week and incorporate that into the Bank of Canada data. Then they can feel more confident about the path forward.
Greg Bonnell – Hafez, it’s always great to get your insights. Thank you for joining us.
Hafiz Nouddin – Thank you so much.
