Transcript: Political, economic crosscurrents complicate next rate decision
Global market strategist Jack Manley says the Bank of Canada has proven itself sufficiently nimble and data-dependent to weather the storm
- Featuring: Jack Manley
- March 4, 2025 March 10, 2025
- 13:01
iStockphoto/MicroStockHub
Jack Manley
Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking interest rates with Jack Manley, executive director and global market strategist with J.P. Morgan Asset Management. We talked about the various crosscurrents impacting rate decisions, recent inflation, and we started by asking about the difficult position the Bank of Canada finds itself in.
Jack Manley (JM): We should expect the Bank of Canada to continue to be data dependent. They don’t care what the market has to say. They march to the beat of their own drum. I also think that they are in a very complicated position at the moment because when you exclude fourth quarter GDP growth — which seems to have had something of a boost from that tax holiday that we saw — you are looking at an economy that is clearly performing below trend, an economy that is clearly under a lot of pressure from the residual impact of higher interest rates. You see that reflected in poor GDP growth. You see that reflected in a high unemployment rate. And those things would suggest that the Bank of Canada should feel comfortable cutting. However, you now have this threat of policy change out of Washington that could end up being not just detrimental to Canadian growth but also modestly, inflationary. And Canada may experience inflation for a number of reasons. It may experience inflation because the Canadian dollar depreciates further, because policymakers decide to levy their own retaliatory tariffs, because of how interlinked global supply chains are. However, the best argument for raising interest rates would not be that inflation in Canada has ticked up in response to tariffs, but that inflation expectations in Canada have ticked up in response to potential tariffs. Inflation expectations are dangerous because they can become a self-fulfilling prophecy.
The argument for easing
JM: I think the arguments for continuing to cut are a lot stronger than the arguments for either holding rates steady or for raising interest rates, and I think they are both centered around economic activity. Canadian GDP growth is running sort of sub-optimal, sub-trend. If tariffs are levied on Canada, we might see several hundred billion dollars of economic output wiped out over the course of the next few years. And all of that would likely require some sort of stimulus to jump start or restart the Canadian consumer and help — if not avoid a recession entirely — at least avoid a bad recession. The other thing that Canadian policy makers have to keep in mind is lower interest rates on the short end, in theory, translate into lower mortgage rates. And lower mortgage rates open up access to the Canadian housing market. So I think the arguments are a lot more compelling on that front.
What tariffs and the threat of tariffs is doing to inflation
JM: So the net impact in the U.S. of tariffs would be an increase in inflation. The question there, though, is by how much and for how long? The quick answer is that tariffs are a one-time adjustment to prices, right? In terms of the magnitude, we have to remember that the U.S. is not a goods-driven economy, it is a services-driven economy, and so tariffs would have only an incremental impact on inflation. We also assume, based off of some internal research, that the aggregate impact of every tariff that was discussed on the campaign trail actually coming to fruition would result in an increase in CPI in the United States of between 0.75% and 1%. — not insignificant, but not returning us to where we were in 2021 or 2022.
And finally, what should investors bear in mind as they contemplate the direction and impact of interest rate moves?
JM: Investors, I would say, need to be cautiously taking risk. You know, if you believe that the U.S. economy will avoid a recession this year, that the Magnificent Seven and artificial intelligence more broadly are indeed part of a long-term secular trend, then you have to be risk-on in portfolio construction. You have to invest in equities. But you also have to acknowledge that there is a boatload of uncertainty out there. The data continue to surprise. Policy continues to evolve. And the rate outlook is murky at best. Hence this idea of being a cautious risk-taker. The way that you take risk cautiously is by investing in quality. When it comes to the fixed-income market, that would mean buying investment-grade debt. In the equity market, it means overweighting the U.S., overweighting large-cap companies, and fishing in a much bigger pond. If you are a diversified global investor, you can take risk. You just want to do so cautiously.
Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Jack Manley of J.P. Morgan Asset Management. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.
**
Go back to the article.
aHR0cHM6Ly93d3cuaW52ZXN0bWVudGV4ZWN1dGl2ZS5jb20vc291bmRiaXRlcy90cmFuc2NyaXB0cy90cmFuc2NyaXB0LXBvbGl0aWNhbC1lY29ub21pYy1jcm9zc2N1cnJlbnRzLWNvbXBsaWNhdGUtbmV4dC1yYXRlLWRlY2lzaW9uLw(U2NyZWVuSGVpZ2h0)NzIw(U2NyZWVuV2lkdGg)MTI4MA(T0ZTWVNfUmVmZXJyZXI)(dmlzaXRvcktleQ)clI4Z01oRVM(dmlzaXRLZXk)dk00R1VQVTc){kind=small}