BoC: 7 years and 54 meetings later, a rate hike could be coming - ING


Markets are expecting a rate hike during tomorrow’s MPC meeting following continued economic growth, hawkish comments and Poloz’s dismissal of the underwhelming inflation report, according to James Knightley, Chief International Economist at ING.

Key Quotes

“Since the 2015 oil price shock, monetary policy in Canada has remained unchanged with the overnight rate being kept at 0.5% and Gov. Poloz’s reputation of being a dove remaining intact. However tables have turned and it appears that the Bank of Canada is preparing to hike for the first time in seven years, as shown by Dep Gov. Wilkins and Poloz who have said respectively that the bank “will be assessing whether all of the considerable monetary policy stimulus presently in place is still required” and that interest rate cuts “have done their job”.”

“The main driver of this stance change being the surprisingly strong improvement of the Canadian economy. However, inflation is not echoing this positive outlook, with the most recent consumer price index in May rising by 1.3% YoY, suggesting little need for any immediate policy tightening. Reflecting on this disappointing data, Poloz said in an interview that “If we only watched inflation and reacted to inflation, we would never reach our inflation target, we’d always be two years behind in the reaction”, adding that the Bank must look to other inflation-predicting indicators – business investment, household spending, household debt and potential output – and that by the first half of 2018 “inflation should be well into an uptrend”.”

“At the beginning of the year, output growth reached 3.7% and is expected to remain robust for the rest of the year. In May, Canadian exports and imports hit record highs, increasing by 1.3% and 2.4% respectively from the previous period. Annual wage rate increases also accelerated to 1.3% and in June 45,300 jobs were added into the economy – four times what economists had expected. This absorption of the economy’s excess capacity combined with the need to curtail the booming housing market and high household debt has led markets to now see the 25bp BoC rate hike as a formality.”

“Speculation about what will happen tomorrow has already had a large effect on the CAD which strengthened 6% on a trade weighted basis since the beginning of May, making Canadian exports less competitive on the international stage. A change in the policy rate could continue to strengthen the CAD as well as affecting consumer loans and mortgages, making credit more expensive. The announcement tomorrow will make it clear how serious Poloz’s hawkish comments have been, with the BoC sending out the strongest signal of policy normalisation after the Fed, leading investors to price in a 93.1% chance of a hike tomorrow. We see the most probabilistic outcome being a dovish hike – with any forward guidance signalling a very shallow hiking cycle.”

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