November 2023 Portfolio Construction
By: Alfred Lam, MBA, CFA, Senior Vice-President, Co-Head of Multi-Asset Vice-President, Investment Strategy CI GAM Portfolio Management and; Richard J. Wylie, MA, CFA, Vice-President, Investment Strategy
CI GAM Portfolio Management CI Assante Wealth Management
What will happen to interest rates in 2024?
Bank of Canada extends “pause”
As can be seen in the graph above, the Bank of Canada has now held administered interest rates steady since its July policy announcement. The range for overnight borrowing was then set at 5.00% to 5.25%, with the official Bank Rate at 5.25%. The cumulative 475 basis points of tightening that began in March 2022 is the largest set of interest rate increases since November 1987 to May 1990, when the Bank Rate was moved from 8.09% to 14.05% (596 basis points). How long these higher interest rates persist will depend upon a number of factors. However, as the Bank moves to regain the credibility lost in recent years, inflation will likely be their primary focus. Importantly, the October 25 release of the Bank’s latest Monetary Policy Report disclosed that slower economic growth and higher inflation are anticipated for 2023 and 2024. The Bank now forecasts GDP growth of 1.2% for 2023 (from 1.8% in the July forecast) and 0.9% for 2024 (from 1.2% in the July forecast). Similarly, the CPI forecasts are now: 3.9% for 2023 (3.7%) and 3.0% for 2024 (2.5%). “CPI inflation is expected to average about 3½% through the middle of next year before gradually easing to 2% in 2025. Inflation returns to target about the same time as in the July projection, but the near-term path is higher because of energy prices and ongoing persistence in core inflation.” The latest figures from Statistics Canada revealed that its consumer price index fell 0.1% (seasonally adjusted) in October. On a year-over-year basis, the CPI was up 3.1%, which is down from the 8.1% peak figure recorded in June 2022 but remained above their nominal 2% target for the 31st consecutive month. The Bank of Canada’s final policy announcement window for the year is scheduled for December 6, 2023.