The Bank of Canada Preview: No December rate hikes but three more hikes to go in 2019

• The Bank of Canada is widely expected to keep the target rate unchanged after hiking the rate by 25 basis points to 1.75% in October.
• The Bank of Canada is expected to cheer the Nafta 2 trade deal as it removes key uncertainty and to highlight graduality as a common approach to future rate hikes.
• The combination of wage growth and improved investment outlook should keep the Bank of Canada on a monetary policy tightening path in 2019.

The Bank of Canada is widely expected to keep the overnight target rate unchanged at 1.75% on monetary policy meeting on Wednesday, December 5.

The Bank of Canada hiked the overnight target rate by 25 basis points on October 24 citing inflation outlook and solid economic growth as the main reasons for the move. “The Canadian economy continues to operate near its capacity, and growth is relatively broad-based across sectors and regions. Meanwhile, inflation is close to our target. What stands out is that, even with today’s increase in the policy rate to 1.75%, monetary policy remains stimulative,” senior Deputy Governor Carolyn Wilkins said to reporters at the press conference after October Monetary policy meeting.

The economic fundamentals did not change much since the October policy meeting with Canadian headline inflation accelerating to 2.4% y/y in October, up from 2.2% y/y in September and the unemployment rate dwelling near a 40-year low. The wages are rising a solid 2.3% over the year and the outlook for Canada’s GDP is boosted by a successful USMCA deal that brightens the prospects for investment and trade.

The Bank of Canada acknowledged multiple times that the economy is operating near full capacity, the employment is rising and the headline inflation is well above the target. Moreover, the October rate hike by the Bank of Canada matched with September rate hike from the US Federal Reserve and a further rate hike by Fed this December will see the Bank of Canada follow next year.

The prospects for a further rate hike by the Bank of Canada are warranted as a senior Deputy Governor Carolyn Wilkins reminded the public after the October rate hike that the neutral policy rate is somewhere higher than the current rate and further hikes are to come.

“Let me remind you that our estimate of neutral is in a range—currently 2.5% to 3.5%. It is a range rather than a point estimate because the neutral rate is unobservable and can change over time,” Wilkins said reporter on October 24.

With this in mind, there are at least three rate hikes in Canada to come in 2019 and that should keep Cadanian Dollar supported.  

Canada’s headline inflation 2013-2018

Source: Stacan