Morning Market Brief: December 19, 2023

BoC holds back on rate cut talk?

In a speech last Friday, his last of 2023, Bank of Canada (BoC) Governor Tiff Macklem indicated it might be too soon to consider interest-rate cuts. While inflation has come down, it remains above the BoC’s 2% target. The BoC sees this as a risk to the outlook for Canada’s economy.?

1. Governor Macklem said it’s “still too early” to consider cutting interest rates. This comment contrasted with the US Federal Reserve Board’s cautious stance at its last meeting, where it noted interest rates are expected to come down later in 2024.
2. The BoC believes inflation is still too high, and the central bank still needs to meet its price stability goal. As a result, the BoC will lift rates further if inflation remains well above its 2% target. The last reading of inflation showed consumer prices rose by 3.1% year-over-year in November.
3. However, Macklem believes the BoC’s key interest rate is at restrictive levels and should help to bring inflation down further. Economic activity has slowed amid tight financial conditions in recent months, putting downward pressure on inflation.
4. By not explicitly ruling out interest-rate cuts, Macklem broadly signalled that it might soon become part of the conversation among BoC officials. The benchmark overnight interest rate currently sits at 5.00%, its highest level since 2001.

Despite heightening expectations that the BoC could begin reducing interest rates in 2024, they are likely to remain higher than a few short years ago. Still, as expectations heighten, bond prices could get a boost if yields move down, particularly those at the longer-term end of the curve. Similarly, equity markets could get a lift, including dividend stocks, which might appear more attractive with lower yields in safer, fixed income investments.

At?CIBC Private Wealth, we aim to take a comprehensive approach to managing, building and protecting your wealth. If you'd like to discuss this market and economic update in more detail, please get in touch with your advisor any time.