Institutional investors are forced to play the waiting game as BoC holds

The Bank of Canada’s decision to hold its benchmark interest rate may have landed without fireworks, but for institutional investors, the implications are anything but straightforward.

Darcy Briggs emphasized that heading into the latest BoC meeting, market participants weren’t pricing in a rate cut. Over time, however, sentiment shifted as growing economic headwinds, including global reciprocal tariffs, steered expectations toward a policy hold.

Reflecting on the central bank’s tone, he noted that the Bank of Canada's April statement leaned heavily on one theme - uncertainty.

“The topic, the word du jour, is uncertainty,” said Briggs, senior vice president and portfolio manager for Franklin Templeton Fixed Income. “It’s mentioned no less than eight times in the document,” he added, highlighting how that tone mirrors global central banks, including the Fed, which are navigating the same murky environment as investors, businesses, and households.

“With this level of uncertainty, it really doesn’t hold a lot of value,” he said, adding that none of the forecasts painted a particularly reassuring picture.

Despite the Bank’s inaction this round, Briggs still sees room and a need for rate cuts. Market pricing currently reflects expectations for only two rate cuts this year, which he suggests being surprisingly restrained.

Meanwhile, Neil Shankar, economist for macroeconomic & FX Strategy at CI Asset Management, agreed the decision from the BoC was one that demanded restraint.

“Institutional investors, like ourselves, are in somewhat of a similar position to the Bank of Canada. We are waiting to see what happens with the Trump administration’s trade policy,” he said. “By holding rates steady here, the bank is taking a less forward-looking approach and conducting monetary policy in a way that’s appropriate, given we could be facing an unprecedented shock that we haven't really seen in over a century.”

Shankar emphasized the importance of staying measured and methodical amid ongoing uncertainty.

“We need to be thoughtful, calm and really disciplined in this environment and so diversification for us has never been more important than it is now,” he said. “And some sectors will certainly be adversely impacted by the evolution of trade policy, but there will be others that may benefit.”

With most of US President Donald Trump’s tariffs on a hiatus until July 4, Briggs emphasized forecasts are near impossible to make.

“If the central banks can’t do it, and they’ve got some of the best models around, that makes it difficult for everybody else,” he said. “Central banks had an opportunity to pause and assess so they took it.”

Meanwhile, Philip Petursson, Chief Investment Strategist at IG Wealth Management, saw little surprise in the Bank of Canada’s decision to hold rates, calling the move a logical response to the sheer unpredictability of US trade policy.

“If the White House can't clearly communicate what their end goal is, how can any central bank properly react?” he said, in a statement. Petursson acknowledged the Bank’s messaging as decidedly dovish, though tempered by concerns about inflation expectations getting out of hand.

“The Bank is walking a tightrope,” he said. “On the one hand, the statement outlines a scenario with a slowdown that puts the brakes on demand, and therefore inflation. On the other, it raises the spectre of higher input costs [around tariffs and supply chains] that risk pushing inflation back up. In short, the two forces are clashing, and the Bank is trying not to get caught up in them.”

BeiChen Lin, senior investment strategist and head of Canadian strategy for Russell Investments, also agreed with Petursson, noting the BoC is “caught between a rock and a hard place.”

The BoC, in his view, is prioritizing medium-term inflation targets over temporary spikes, a sign that it may lean into easing policy later this year if growth continues to falter.

“The decision to hold interest rates unchanged means that the discount rate applied to pension liabilities remained constant,” he said. But he also warned that equity market volatility, particularly in the US, could still weigh on asset values.

“We did see a large selloff in US equities… Pension funds with large US equity exposure may have seen a reduction in the value of their plan assets, which would weigh on their funded status,” he said.

As for monetary policy’s path forward, Lin suggested the central bank could end up “catching down” with a supersized cut in the future.  

“If the labour market weakens further or the tariff standoff persists longer than expected, the BoC may even have to ‘catch-down’ on the interest rate in June,” he said.

Briggs doesn’t expect a flurry of cuts just yet and Shankar also agreed on the likelihood of further easing but emphasized the need for clarity first.

“Once the data is tilting in one direction or the other, they will be able to act decisively,” he said.

Still, the decision to hold isn’t exactly a comfort to all as Briggs underscored that every pension fund and investor is operating under unique conditions, but what unites them now is a shared challenge of navigating persistent volatility.

“Volatility is going to be in everybody’s lexicon and very much a focus until we actually get a settled type of environment,” he said.

Indeed, while volatility introduces risk, Briggs believes it also creates opportunities, particularly for active managers. In his view, this isn’t a climate suited to passive strategies.

“If the environment unfolds like we suspect it will unfold, which would be lower growth, duration should actually provide some pretty attractive returns,” said Briggs.

Petursson emphasized that institutional investors have no choice but to play the waiting game until the central bank’s next decision on June 4. 

“For now, it’s watching, assessing and waiting to see if Trump is bluffing again… or if he’s just shown his real cards,” said Petursson.