14 April, 2022

Weekly Update - Bank of Canada hikes rates while markets continue slide

As widely expected, the Bank of Canada increased its policy rate by 50 basis points to 1.0% this week. The Bank notes that growth is strong and the economy is moving into excess demand.

 

“Labour markets are tight, and wage growth is back to its pre-pandemic pace and rising. Businesses increasingly report they are having difficulty meeting demand and are able to pass on higher input costs by increasing prices,” the Bank said in its release, adding that “robust business investment, labour productivity growth and higher immigration will add to the economy’s productive capacity, while higher interest rates should moderate growth in domestic demand.”

 

The half percentage point move – the first since May 2000 – comes as inflation in Canada looks set to top 6% for the March reading. U.S. inflation leapt to 8.5% as announced Tuesday morning, while the American producer price index in March climbed 1.4% to 11.2% in March – the largest monthly increase on record.

 

Markets are betting Canadian rates will go as high as 3% by this time next year. The Bank also said it would stop replacing its holdings of maturing government bonds on April 25, a process known as quantitative tightening.

 

The moves by the Bank are a major test for an economy with one of the highest debt burdens and most expensive housing markets in the world.

 

On markets, stocks nursed losses earlier in the week as markets grappled with the campaign by central banks against elevated inflation pressures, Russia’s grinding war in Ukraine and China’s covid travails. By the end of the week, stocks added back some of the ground lost previously.

 

As markets continue to react and adjust to changing conditions, a continued focus on your long-term goals remains the best course of action. Investing through a well-diversified portfolio has historically provided the best experience through a combination of goals-based returns and reduced volatility over time.

 

  • Short-Term View: Stocks slowed their downward momentum as its becoming crystal clear that central bankers will be resorting to big rate increases to combat inflation.

  • Longer-Term Thinking: Sticking to your long-term plan through periods of volatility is central to investment success.

  • Logic Over Emotion: Perspective is key. Focus on long-term goals and timeframes. Contact your advisor to discuss any questions and concerns you may have.

Our Experts Say...

 

“At the moment, the market is vacillating on a daily basis as to whom it believes will be the winners and losers”

 

Corrado Tiralongo

IPC Chief Investment Officer

 

 

 

Over the past 10 years, markets are positive. Perspective is key. Markets do react to short-term increases in volatility – see the grey lines below – but the long-term trend is upward in the blue and red lines.

 

 Source: Morningstar Direct. Growth of $100,000 shown. Total returns from Jan. 13, 2012 to April 13, 2022 in local currency. Volatility is illustrated by the rolling 5-day minimum and maximum percentage change for each of the indices shown.