Interest rates likely higher for the long term: BMO

Interest rates likely higher for the long term: BMO

Click the link above to read the full article. The article was published on February 3, 2023 and written by James Langton at Advisor's Edge.

We have heard more of a "dovish" tone from Canadian and US central banks in their recent speeches. They seem to be more optimistic that inflation is under control. Despite this, Jerome Powell cautioned the fight is not over. (https://www.ft.com/content/5ffabb5f-4664-4cad-9e93-b09923acaced).

We are going to be cautious about declaring victory and sending signals that we think the game is won, because we’ve got a long way to go,

In the report from BMO Economics,

...expects rates to start coming off their current highs in 2024, ultimately settling in the 2.5% to 3.0% range in Canada, and a bit higher than that in the U.S. — leaving long-term rates higher than in recent years.

...inflation was exceptionally low in the years leading up to the pandemic due to the impact of globalization and emerging markets joining the global economy, which boosted the global labour force and helped keep inflation low — enabling central banks to keep rates low too.

What does the future look like? Since the early 1990's inflation has maintained below it's long-term average of 3%. It does not seem like we will see inflation rates below that long-term average in the next few years.

That highly favourable backdrop for low inflation is gone, with the world unlikely to find another massive increase in labour supply, as well as rising geopolitical tensions, and the trend toward friendshoring. Layer on the cost of decarbonization, and it’s easy to see why inflation could trend at least modestly higher than pre-pandemic norms, especially for goods.

What do higher rates mean?

...higher-than-normal rates for the long term will have implications for housing markets and financial assets

When it comes to financial assets, we saw stocks readjusting to the new rate reality last year.

Most markets have precious little risk premium built in at the moment, and are potentially vulnerable to any negative surprises, whether it’s on the inflation/rate front or on the growth outlook (perhaps due to a geopolitical shock).

Higher rates don't mean negative years for every stock. The key might be more certainty in the central banks plans. If companies know what their costs are it makes it easier to assess the value of projects. It is important that your investment plan matches your time horizon, risk tolerance and capacity.

The article was published on February 3, 2023 and written by James Langton at Advisor's Edge. Check out James profile here.

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