Within their inflation commentary, the BoC noted that shelter costs have risen due to higher rents and higher mortgage costs. That is one inflationary impact of the rate hiking cycle, however Marcogliese believes it’s somewhat less of a concern than other inflation drivers. He says that mortgage costs driving inflation will only force the BoC to cut if it is the sole driving force and all other contributors to CPI or core CPI are in line with the Bank’s targets.
Brooke Thackray, research analyst at Horizons ETFs, noted that the BoC is combatting another driver of inflation: government spending. As the Federal Government increases the deficit with more spending programs, that has an inflationary impact on the economy. That could shift the aggregate inflation data and keep inflation higher for longer. Thackray largely agreed, however, that cuts should come in April of next year, but doesn’t think we’re going to get any cuts deep enough to bring rates to COVID levels.
“We’re at this stage right now with rates at 5% and people are looking at this and saying it’s not normal, but if you go back historically speaking that’s not really a high rate,” Thackray says. “We are probably not going to go back down to where we were before.”
Thackray thinks the BoC will pause at its next meeting in January as well, as any eventual decision to cut should come with a much firmer understanding of both inflation and GDP growth. If the BoC cuts prematurely, and inflation rears its head again, that could result in a much more significant problem as switching back into a hiking cycle can be very difficult.
Looking at Canadian equities coming out of the decision, Thackray thinks they’re broadly well-positioned given their somewhat lower valuations. Canada is heavily underweight tech, which is the leading global growth sector in 2023, but he expects there to be some rotation out of tech towards more value-based and commodity names next year, which are better represented on the TSX. Even as global growth slows, there is massive demand for Canadian natural resources and that should have a tailwind impact on the TSX in Thackray’s view.
