Alert: Bank of Canada Didn’t Raised Interest Rates!

The Bank of Canada has decided not to raise interest rates. Tourmaline Oil (TSX:TOU) could be a hedge.

| More on:

The Bank of Canada has decided not to raise interest rates after today’s policy meeting. That means the Bank of Canada’s overnight lending rate is 0.25%. This rate hasn’t been changed since March 2020, when the pandemic first erupted. 

In response, Canadian stocks are trading much higher. The TSX 60 Index is up 1.3% in early morning trading. 

The policy rate decision has implications for valuations, inflation, and the economic outlook for the rest of the year. Here’s what investors need to know. 

What happened?

The nation’s central bank was expected to raise rates this morning. Bay Street analysts and institutional investors all predicted a significant rise in rates and an aggressive pullback of stimulus measures. The odds for a rate hike were as high as 70% yesterday. 

Analysts were so confident about this prediction because of economic indicators. Canada’s economy now faces the highest rate of inflation in 30 years. Benchmark interest rates are a critical tool to combat this rise in the cost of living. This is why some analysts were expecting the overnight lending rate to climb to 0.5% or even 0.75% this morning. 

However, the Bank of Canada has dashed those expectations. Governor Tiff Macklem and Senior Deputy Governor Carolyn Rogers are expected to attend a press conference at 11 AM to further explain their team’s decision.

So what?

With the rate hike postponed, borrowers in Canada can expect a few more months of record-low borrowing costs. This means businesses can tap into liquidity at cheaper rates. It also means that property investors and homebuyers have a few more months of cheap mortgages. 

The stretched valuations of stocks and real estate should expand further in the months ahead. Unfortunately, the cost of living could also be stretched alongside the capital markets. Food, fuel, and shelter are already historically expensive. The inflation rate stands at 4.8% right now. This could rise higher in the months ahead. 

Meanwhile, the market’s expectations of a rate hike have now moved to the next quarter. Odds for a hike in March are now up to 100%. Analysts see up to five rate hikes over the course of 2022, which could bring the benchmark rate to 1.5%.  

Now what?

Predicting interest rates is notoriously difficult. Even though the market is now absolutely certain the rate will rise, economic factors could change that trajectory. A sudden drop in economic activity, a rise in unemployment, or a new variant of the virus could derail the Bank of Canada’s projections. 

What we know for certain is that inflation is higher and could be difficult to tackle. Investors may need to protect their portfolio by adding exposure to an inflation hedge like Tourmaline Oil (TSX:TOU). Canada’s largest natural gas supplier is a low-risk bet on rising fuel costs

Tourmaline stock currently trades at a price-to-earnings ratio of eight. Meanwhile, the rising cost of natural gas has pushed up expectations of free cash flow in 2022. Based on forward estimates, the stock is trading at a price-to-free cash flow ratio of 5.36.

With interest rates at record lows and an economic outlook that’s hard to predict, Tourmaline stock could serve as a safe haven. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Vishesh Raisinghani has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

More on Energy Stocks

man touches brain to show a good idea
Energy Stocks

1 No-Brainer Energy Stock to Buy With $500 Right Now

Should you buy a cyclical energy stock at its decade-high? Probably not. But read this before you make a decision.

Read more »

A solar cell panel generates power in a country mountain landscape.
Energy Stocks

Top Canadian Renewable Energy Stocks to Buy Now

Here are two top renewable energy stocks long-term investors can put in their portfolios and forget about for a decade…

Read more »

oil and gas pipeline
Energy Stocks

Where Will Enbridge Stock Be in 3 Years?

After 29 straight years of increasing its dividend and a current yield of 6%, here's why Enbridge is one of…

Read more »

Pumpjack in Alberta Canada
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold for 2025?

Enbridge stock just hit a multi-year high.

Read more »

oil pump jack under night sky
Energy Stocks

Where Will CNQ Stock Be in 3 Years?

Here’s why CNQ stock could continue to outperform the broader market by a huge margin over the next three years.

Read more »

engineer at wind farm
Energy Stocks

Invest $20,000 in This Dividend Stock for $100 in Monthly Passive Income

This dividend stock has it all – a strong outlook, monthly income, and even more to consider buying today.

Read more »

A worker overlooks an oil refinery plant.
Energy Stocks

Is Imperial Oil Stock a Buy, Sell, or Hold for 2025?

Valued at a market cap of $55 billion, Imperial Oil pays shareholders a growing dividend yield of 2.4%. Is the…

Read more »

Pumpjack in Alberta Canada
Energy Stocks

Where Will Imperial Oil Stock Be in 1 Year?

Imperial Oil is a TSX energy stock that has delivered market-thumping returns to shareholders over the last two decades.

Read more »