Yahoo Finance Sun Life CEO sees potential for more interest rate hikes
Kevin Strain says it's unclear whether the Canadian economy is headed for a recession
The head of one of Canada's largest life insurance companies says further interest rate increases in Canada and the U.S. are still a very real possibility despite signs that inflation is starting to moderate.
"It feels like the increases in interest rates by the Fed in the U.S. and in Canada are definitely bringing inflation down," Kevin Strain, chief executive officer of Sun Life Financial (SLF.TO) (SLF), told Yahoo Finance Canada in an interview.
He says he's expecting "one, two, maybe three" smaller rate increases this year.
Inflation in Canada has steadily eased to 6.3 per cent annualized in December from its June peak, though it's still well above the central bank's two per cent target.
There are still a number of risks present that could put upward pressure on inflation, Strain says, including geopolitical turmoil, China emerging from its strict zero-COVID policy, supply chain issues and energy costs.
"My expectation is that interest rates could go up a little bit, but the steepness of the increase will be much smaller," he said.
"I think the U.S. is probably looking at one or two (hikes), and whether Canada will need to follow that or not is debatable, but I think it could be both."
The Bank of Canada released a summary of its discussions for the first time ever on Wednesday, showing it contemplated keeping its benchmark rate unchanged at its meeting last month, but ultimately chose to hike because of the hot economy.
During the press conference in January, the central bank signalled it would pause its tightening cycle if the economy evolves largely in line with its forecast.
However, with the Federal Reserve indicating it's not done hiking its benchmark rate, the impact on the Canadian dollar might come into play, Strain says.
"The U.S. is increasing interest rates. I know the [Bank of Canada] would probably like to pause and I know that's what they've talked about but of course, if they don't follow the U.S., that would have definite impacts on currency which would need to be watched," he said.
"If currency deflates, that will in turn create inflation, which will put more pressure on. So I think you'll find that the Bank of Canada will watch what's happening in the U.S. really closely."
As the value of the Canadian dollar falls against the U.S. dollar, it makes importing American goods more expensive and therefore could potentially exacerbate inflation.
Strain also says it's still unclear whether the Canadian economy is headed for a recession because of the strength of the labour market.
Sun Life Financial reported core earnings rose 4.3 per cent in the fourth quarter year-over-year and topped analyst estimates, driven mainly by strength in its Canadian and U.S. businesses.
Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.
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