balanced fund quarterly report

June 30, 2023

Economic Commentary

Headline inflation continues to decline but remains at elevated levels. Despite the recent improvement, inflation continues to be a concern for global central banks as levels remain much higher than their 2% target. Even though higher interest rates could have a negative impact on global economic growth, with the possibility of a recession occurring, fighting inflation remains the key goal for central banks. After declining steadily since the peak of 8.1% last June, Canadian inflation unexpectedly moved higher in April, before moving lower again in May. This minor uptick led to a surprise increase in interest rates by the Bank of Canada at the next meeting. Canadian inflation now stands at 3.4%. Although headline inflation has improved considerably, core inflation remains sticky and has not shown the same level of improvement as the broader measure. Inflation in Europe has not improved nearly as much as in North America, with U.K. inflation currently sitting at 8.7%.

Global central banks remain resolute in their fight against inflation and continue to raise interest rates. After pausing for several months, the Bank of Canada surprised markets with a 25 bp increase in rates at its June meeting. An unexpected uptick in inflation along with stronger economic demand contributed to the move. In the U.S., the Federal Reserve raised interest rates by 25 bp in May and then paused at its June meeting. This was the first pause by the Fed in 11 meetings, however, they strongly indicated that future moves are expected later this year, with another 50 bp built into their economic projections. Rate hikes in Europe were more aggressive, with the European Central Bank raising rates by 25 bp on two occasions. The Bank of England was even more aggressive with a 25 bp increase in May followed by a 50 bp move in June. Persistent inflation contributed to the larger moves in Europe. Further increases by all of the major central banks are expected to continue throughout the balance of the year. Contrary to previous expectations, interest rate cuts are unlikely to occur until sometime next year.

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