Rates on hold for now, but likely not for long

Investors could see two or three interest rate hikes from the Bank of Canada next year, a Franklin Templeton senior vice-president suggests, but the central bank could be confined by the pace set south of the border.

“The futures market is pricing in a pretty low probability that the Bank of Canada is going to move before March or April of next year, but the odds have been rising a little bit,” said Ian Riach, senior vice-president and portfolio manager at Franklin Templeton Investment Solutions.

Riach was speaking Tuesday during Franklin Templeton’s 2022 Global Investment Outlook & ESG Investing Virtual Event.

“Even then, we are looking at two or three hikes at the most for all of 2022. We don’t think the Bank of Canada is going to get too far ahead of the [Federal Reserve] in terms of short-term rates.”

This is because a rise in rates could increase the value of the Canadian dollar relative to the U.S. dollar and therefore make imports from Canada more expensive to U.S. buyers, Riach suggested.

The Bank of Canada is expected to hold its overnight rate at 0.25% at its announcement on Wednesday.

Riach said he doesn’t expect to see bond yields increase much from here, “either on the shorter or longer end.

“This was a lot easier to say a couple of weeks ago, when the 10-year Government of Canada bond yield was around 1.8%,” he said. “We have seen some pullback in rates over the past few days, given the concern over [the Covid-19 variant] omicron.”

Inflation was also top of mind during the Franklin Templeton conference.

The annual pace of inflation in Canada hit 4.7% in October, the largest year-over-year gain in the consumer price index since February 2003.

South of the border, consumer prices rose 6.2% in October from a year earlier, the highest inflation rate in 31 years.

“That is a far, far cry from what we saw pre-Covid,” said Bill Yun, executive vice-president and head of advisory and wealth strategy at Franklin Templeton Investment Solutions, speaking at the same event.

Pandemic shutdowns led to shortages of items such as computer chips, automobiles and consumer goods, said Yun. A labour shortage resulted from people not returning to work and early retirements.

“You combine those issues with higher energy prices and you really did get to an inflation level which was beyond transitory,” said Yun.

“As we go through 2022, we expect the inflation numbers we are seeing today to come down to 5% in the middle part of the year and closer to 3% towards the end of the year. We think in the longer term that’s where these numbers will settle out.”