Portfolio Perspective

As interest rates rise in a very managed way, our partners at National Bank Financial (NBF) Economics offer a portfolio perspective. What are the impacts of a strong economy amid trade wars and geopolitical shuffling? Recall that Canada, as well as other trading partners have experienced an exceptionally low interest rate environment since 2008.

How do the Central Banks tread water to control inflation, yet facilitate growth? The neutral rate is the policy rate consistent with full employment, trend growth and stable prices. It is an important concept, yet the Bank of Canada (BoC) is having a difficult time defining the range for the future bank rate. NBF Economics expect monetary normalization to proceed slowly. It will take an accumulation of good news to prompt policy action. In this regard, the strong headwinds felt by the economy in early Q1, with GDP reported to have contracted 0.1% in January, have left the central bank with room for patience.

Where is the Bank Rate Going?

While financial markets are giving 31% odds of the Canadian overnight rate reaching at least 2.0% (three more BoC rate hikes) in 2018, the fed funds futures market gives 80% odds of the effective fed funds rate trading at or above 2.125% by year end. Consider that NBF expects that 10-year BoC bonds will be at 2.63% by the end of 2018. What does this mean for your portfolio? Enjoy the Fixed Income Monitor from National Bank Financial for a fulsome discussion on interest rate trends here.

https://www.nbc.ca/content/dam/bnc/en/rates-and-analysis/economic-analysis/monthly-fixed-income-monitor.pdf