Fixed income portfolio allocations continue to evolve under the neutral rate policy of the Bank of Canada (BoC). This approach is to maintain an interest policy rate consistent with full employment, trend growth and stable prices. It is an important concept in order to understand how your fixed income portfolio will be impacted looking forward.
We 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. The BoC now has the luxury of waiting to see how the housing market performs in May and June before updating its economic projections for the July 11 Monetary Policy Report. By then we expect that evidence of a pickup in growth will be widespread enough to prompt a rate hike. We continue to see the overnight rate ending 2018 at 1.75%.
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