rates
MODEST ECONOMIC GROWTH POINTS TO A CONTINUATION OF LOW RATES To put a finer point on the notion that rates are most likely to continue to remain near their long-run lows, one can consider the relationship between government bond yields and annual GDP growth.
In Canada, the long-run trajectory for annual GDP growth is relatively modest (around 2%), meaning there isn’t much of a tailwind for inflation or, by extension, rates. Canada is not alone in this regard, with other similar industrialized countries like the US experiencing both slow GDP growth and low interest rates. Some low-growth countries with less-developed banking sectors do experience high interest rates but low GDP growth, while others experience low GDP growth due to persistently high inflation that belies widespread economic malfunctioning. Due to its stability, institutions, and economic maturity, Canada is not, and won’t be for the foreseeable future, in any of the ‘High Yield’ or ‘High Growth” groups. At the risk of beating a dead horse, expect interest rates to remain low and stable for years to come.
All else being equal, higher rates of GDP growth should translate to higher interest rates (both short- and long-term ones), as quickly-growing economies tend to yield quickly-growing prices. This places an emphasis on the need for Central Banks to attempt to corral inflation through a higher overnight target rate, and it similarly imposes on long-term borrowers the need to compensate investors for the higher inflation that whittles away their return through higher yields.
SLOW AND STABLE WINS THE RACE
8.0%
China
6.0%
Indonesia
Isreal
4.0%
United States
2.0%
Russia
Canada
Switzerland
Turkey
0.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
YR GOVT BOND YIELD
MODEST YIELD HIGH GROWTH
HIGH YIELD HIGH GROWTH
HIGH YIELD MODEST GROWTH
HIGH INFLATION
SLOW & STABLE
SOURCE: THE ECONOMIST
rennie.com
21
Made with FlippingBook - professional solution for displaying marketing and sales documents online