BoC Cuts Key Rates to 4.5% as Expected: Where Should Investors Focus?

The Bank of Canada delivered a second straight cut to its key interest rate after a quarter-point reduction in June and signaled that further cuts may be forthcoming due to mounting concerns over economic headwinds.

The Bank of Canada lowered its overnight rate target to 4.5% from 4.75% on Wednesday, citing growing economic slack, a significant cooling in the job market, and stagnating household spending as consumers increase savings to manage loan payments.

Governor Tiff Macklem of the Bank of Canada expressed a growing belief that inflation is trending towards the 2% goal, anticipated to be reached by next year. At the same time, Macklem cautioned that the journey to achieving this inflation rate might not be direct, and the timing of future rate reductions will hinge on how inflation evolves.

"With the inflation target in sight and more excess supply in the economy, the downside risks are taking on increased weight in our monetary policy deliberations," Macklem said. "We need growth to pick up so inflation does not fall too much, even as we get inflation down to target."

Since the Bank of Canada's rate cut on June 5th, the S&P/TSX Composite Index has risen by over 3%. The Real Estate, Information Technology, and Consumer Staples sectors have led the gains, with gains of 8.7%, 6.6%, and 5.5%, respectively.

Mike Archibald from AGF Investments is focusing on certain sectors for potential gains: "Following the initial rate cut by the Bank of Canada in June, we saw a strong rally in commodities, with materials and energy sectors leading. I expect cyclical and interest rate-sensitive sectors to respond well to further rate cuts in the upcoming months," he notes. "Utilities and REITs, which have lagged behind due to the rapid rate hikes to combat inflation, seem to be stabilizing in response to expectations of a more relaxed monetary policy ahead."

Greg Taylor from Purpose Investments highlights the Canadian market's limited tech and AI exposure, pointing out that a rise in cyclical sectors is necessary for the S&P/TSX to thrive. According to a June report, "Commodities have seen mixed to slightly positive results this year, while financials and utilities, which make up a substantial portion of the market, have been hit hard by the rising interest rates."

Beyond these sectors, the hike in interest rates has led investors to seek income through bonds and GICs. Yet, with a substantial amount of U.S. retirement funds in cash, the potential dip in interest rates may diminish cash returns, driving investors towards dividend stocks for better yields. Now, it's time to explore elite stocks that could bring you juicy dividend payouts in an easing cycle .

Source: Bloomberg, Morning Star