Invesco Canada blog

Insights, commentary and investing expertise

Interest rate outlook: Bank of Canada likely to raise rate again

The Bank of Canada (BoC) has hiked interest rates at two consecutive meetings, bringing the overnight benchmark rate to 1.00%.1 GDP growth and employment trends remain strong, while inflation has stayed below the BoC’s 2.0% target. The Canadian 10-year government bond yield has followed an upward trend after hitting its lows in the second quarter. We believe higher rates are likely.

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Fed balance sheet normalization at last

The U.S. Federal Open Market Committee (the Fed) held interest rates steady at Wednesday’s meeting, with a target range of 1% – 1.25%. After preparing the markets over the last several meetings, the Fed finally announced they would begin their long-awaited balance sheet reduction plans in October 2017.

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Fed balance sheet normalization at last

Interest rate outlook: BoC moves firmly into hawkish camp

The Bank of Canada (BoC) has moved firmly into the hawkish camp, with a rate hike to 1% this month, leaving the market expecting one more rate hike this year. The benchmark rate was raised to 0.75% in July.1 Recent economic data continues to surprise to the upside.

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Surprise hike from hawkish BoC

In a move that surprised the market, the Bank of Canada (BoC) hiked the target overnight rate to 1% at today’s monetary policy meeting. This is the second hike in a row for the BoC. The market was not expecting the next rate hike until the Bank’s October meeting.

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Currency outlook: CAD rally continues

The Canadian dollar has rallied significantly this year following the Bank of Canada’s (BoC) switch to a hawkish tilt. The combination of reasonably strong growth and the expressed intent of the BoC to remove both emergency rate cuts from 2015 left the market covering shorts in the Canadian dollar. The extreme rally has left the currency susceptible to a short-term retracement, in our view.

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Interest-rate outlook: Long-term U.S. rates now more dependent on global monetary policy

After hitting lows for the year in June, 10-year government bond yields rose to a two-year high of 1.89% in July,1 as the Bank of Canada (BoC) unsurprisingly increased its benchmark rate from 0.50% to 0.75%.2 The accompanying statement was upbeat as well, brushing off softer inflation numbers as temporary. The BoC’s optimism will probably keep the possibility of another rate hike alive at each of its upcoming meetings. We expect interest rates in Canada to rise from current levels, but we are looking for signs that rates may have topped out in the short term.

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