The Bank of Canada increased its rate by 100 basis points, rather than the anticipated 75 basis points, yesterday – raising its target for its overnight and deposit rates to 2.5% and the bank rate to 2.75%. It noted that inflation is higher and more persistent than expected, and will likely remain around 8% for the next few months, but its Governing Council is committed to continuing to take the action needed to achieve its 2% inflation target. The bank’s July outlook anticipates inflation will drop to about 3% by the end of 2023 and its 2% target by the end of 2024.
Yesterday, it was announced that the U.S. consumer price index (CPI) also rose to 9.1% in June, 1.3% higher than May. Energy, food, and shelter costs created the most pressure as the energy index rose 7.5.% over the month, contributing almost half the increase.
Damiani said managing the behavioural part of this environment is the most important thing that advisors can do right now because it’s very psychological for clients to watch their investment values fluctuate on paper as inflation climbs and the central banks try to wrestle it down.
“The bank expects that, in the latter half of the year, we’ll see inflation start to come down,” said Damiani. “So, part of the explanation I give people is the Bank of Canada is limited in terms of the levers it has to control inflation and it’s targeting demand. It’s cranking up interest rates really quickly to intentionally cool the economy.”
Damiani said this is impacting retirees because, even while they may be getting a higher interest rate on their savings, inflation is outpacing it even while the markets are down. The companies doing well are the ones with pricing power, so it’s important to keep clients’ portfolios balanced with cash, savings, and diversified, conservative, long-term investments, though it’s a good time to pick up some companies “on sale”.
