Investors and businesses should get used to interest rates hovering around these levels for at least the next year, according to the head of Canada’s second-largest insurer.
“I don't believe that you're going to see the types of increases that we saw last year where rates went up so rapidly, but I do believe that you're going to see rates be somewhat stubborn where they are, and could go up a little bit or even down a little bit,” Kevin Strain, president and chief executive officer of Sun Life Financial (SLF.TO) (SLF), told Yahoo Finance Canada in a phone interview.
“It's a little bit hard to predict what will happen but I think you're going to see them stabilize more closely to where they are today for at least a good 12 months.”
Market data on Tuesday showed investors once again pared back bets for a rate cut following the latest inflation data.
Consumer prices in Canada rose 4.4 per cent in April year-over-year, Statistics Canada reported, topping economist expectations of a 4.1 per cent increase. It was the first time since June 2022 that inflation accelerated.
Rising pump prices and housing costs helped push the headline number higher.
One of the reasons inflation has been so difficult to bring down is because it’s not just a demand issue, Strain says. Supply chain problems, energy prices and the geopolitical environment are also to blame, which are supply related and not as sensitive to monetary policy.
“I think longer term we can expect inflation to be a bit higher than what we had seen where it was zero, one or two per cent. I think you're looking at probably three to four (per cent) longer term,” he said.
“The movement to higher interest rates certainly help to reduce inflation, but again, it's that structural element to it, that's not just related to demand, is what’s making it a little bit more stubborn.”
Asset management business to benefit from stable rates
Interest rate stability should bode well for Sun Life’s asset management business, Strain says, as it removes financial market headwinds from the prior year when rates increased rapidly.
In its first quarter earnings results last Thursday, the company reported profit that beat analyst estimates thanks to strong insurance sales, but earnings from its asset management division fell 12 per cent due to lower fee revenue and volatility in global markets.
The company has also been building its capital position and aims to use that cash to expand organically.
“We're in economic times that are a little bit more turbulent so having a strong capital position is good for that," said Strain. "Our priorities are organic growth. We think that adds the most value to shareholders. Our dividend, having a stable and growing dividend for our shareholders, we know that's important to them. And then building out capabilities and scale is the third part."
Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.