Bank of Canada hikes and hawkish tone suggests more to come - ING

James Knightley, Chief International Economist at ING Bank explained that the central bank of Canada raised rates by 25bp today, but the question now is what will their 2019 tightening path look like? 

Key Quotes:

"Downside risks linger, but unless they escalate, we see two more hikes coming next year."

"As widely expected, the Bank of Canada hiked the policy rate by 25 basis points bringing it to 1.75%."

"Although we expected to see a more dovish tone given the poor September CPI print of 2.2% year on year -considerably undershooting the 2.6% YoY consensus, the BoC remained upbeat with the view that the limited spare capacity in the economy will continue to put pressure on prices. This is why it looks set to continue on its tightening path."

"Core inflation is the key variable for policy decisions, and despite the slight dip in September, the three main measures still averaged the BoC’s 2% target."

"As long as core data floats around this level, we expect further tightening in 2019."

"Given the Bank of Canada still expects inflation to be at, or above, its target, and the growth outlook is still looking reasonable, we stick with our base case of two rate hikes in 2019."

"If lingering downside risks subside, then a third hike next year isn't entirely out of question, particularly, if we see a pick-up in wage pressures on the back of labour shortages, as was hinted at in the latest BoC Business Outlook Survey."