Invesco Canada blog

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Avi Hooper | July 16, 2021

Bank of Canada policy predictability is underpriced in Canada

Invesco Senior Portfolio Manager Avi Hooper shares the latest Bank of Canada announcement and the market reaction. 

The Canadian economy is likely heading for a strong economic recovery. High levels of savings and vaccinations are a cocktail for a domestic demand re-opening upswing across parts of the large service sector of the economy.

The problem for other countries who re-opened earlier has been the lack of supply for this pent-up demand. Labour is becoming scarce. Shipping costs will remain high for an extended period as ships re-align to current global trade trends, and the subsequent goods shortages will continue as a result. While prices are rising and inflationary in the near term, in the medium-term potential growth rates are expected to be lower, removing inflationary pressures.

This week, the Bank of Canada (BoC) presented a more neutral perspective on the outlook. Optimism at home is not being shared globally. Canada has an open economy, and the global economic cycle takes priority. Markets reacted surprisingly following the press conference, removing market pricing that penciled in the first rate hike by the Bank in April 2022. Current rates of inflation are being heavily impacted by base effects. For Canada, a stronger currency has meant our import prices have not risen as much as elsewhere. Bank of Canada Governor Tiff Macklem brought a predictable market communication – this hasn’t always been the case.

From a global perspective, Canadian fixed income continues to offer relative value. The federal government yield curve is reasonably steep, even more so in selective corporate bond yield curves. Credit quality is improving for provincial and municipal governments, as economies re-open sooner than anticipated, supporting stronger tax revenues and lower bond issuance. The balance of payments, supported by high commodity prices and portfolio inflows, continues to favour a stronger Canadian dollar.

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The opinions referenced above are those of the author, Avi Hooper, as of July 14, 2021. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

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