Will Bank of Canada rate change this year?

2019 saw no movement in administered interest rates in Canada, after a busy period of rising rates that began in mid-2017 and lasted into 2018.

The US Federal Reserve Bank is expected to hold its overnight rate steady in 2020.

The US Federal Reserve is expected to hold its overnight rate steady this year. Indeed, the Fed might not even begin to increase its rate again until after 2021. Just one of the economic research departments of Canada’s big banks projects a rate increase in 2021. RBC forecasts a 25-basis-points increase in the fourth quarter of 2021.

Notably, none of the banks is forecasting a cut. Despite trade tensions and the global economic slowdown, the Fed declared the outlook to be favourable in mid-December. It, therefore, maintained its rate at between 1.50 and 1.75 per cent.

Policy rate looks to remain steady in 2020

What the Bank of Canada decides to do in 2020 may be more of a mystery. Many analysts had predicted the bank would lower its rate in early December. But the bank remained on hold, prompting most forecasters in a Reuters poll to predict no rate increase in 2020. [ed.—Indeed, on January 22 the bank kept its policy rate unchanged at 1.75 per cent.]

The economic research departments of Canada’s big banks, however, tend to be more dovish. Two predict one 25-basis-points cut, two predict two such cuts, and one forecasts no change.

The cuts by the US Federal Reserve and other central banks made it a very strong year for Canadian bonds.

Near the end of 2019, the FTSE TMX Universe Bond Index had risen 6.8 per cent. However, it still underperformed the TSX’s 18.7-per-cent return over the same period by a wide margin. Corporate bonds outperformed government issues.

Preferred shares lost in 2019

After posting a loss of 10.6 per cent in 2018, the S&P/TSX Preferred Share Index continued to lose ground in 2019. The index was down about 4.2 per cent from the previous year.

Our recommended preferred shares delivered a mixed performance. On a total return basis, our floaters declined an average 6.9 per cent. Our straight preferreds as a whole rose just 4.2 per cent, while our three straight fixed perpetuals were up an average 14.1 per cent.

There’s one key factor that explains the overall decline in Canadian preferred shares. Most of the Canadian preferred share market is made up of rate-reset preferreds, which are sensitive to interest rates. Since the bias of rates in 2019 was downward, rate-reset issues and our floating-rate issues, which are also sensitive to interest rates, suffered. Investors began to anticipate lower interest payments from both these types of issues, and therefore sold them, driving their prices down.

This was not the case with our straight fixed preferreds that pay a fixed perpetual dividend that does not change. We continue to favour these shares over floaters for now, as the Bank of Canada may well cut its overnight policy rate later in 2020, pressuring floaters even further.

This is an edited version of an article that was originally published for subscribers in the January 3, 2020, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.

Money Reporter, MPL Communications Inc.
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