Interest Rate Bank of Canada Hikes
td economics: Brian DePratto, Senior Economist
Interest rate Bank of Canada hikes,.. with more likely to come.
- The Bank of Canada met market expectations, raising its key
monetary policy interest rate by 25 basis points, to 0.75%.
- The outlook for growth was upgraded again, with an economic
expansion of 2.8% forecast for this year (up from 2.6% in April). 2018 was also
upgraded a tick, to 2.0%, while the forecast for 2019 was revised lower, to
1.6%(from 1.8%) on the back of softer expectations for government spending and
net trade. Consistent with the upgrade, the Bank of Canada again pulled forward
its estimate of when the output gap will close, to "around the end of
- In the text accompanying the decision, a relatively upbeat
tone was struck, pointing to the absorption of a 'significant' amount of
economic slack, a broadened base of economic growth, and an expectation of
rising wages and employment. The statement was however careful to note that
although the current outlook warranted the remove of some monetary stimulus,
future rate adjustments will be data-dependent.
- Inflation was the missing piece of the puzzle ahead of
today's decision. While acknowledging the lack of inflation, the Bank views
recent softness as mostly temporary, pointing to food price competition,
Ontario's electricity rebates, and other factors as holding back overall price
growth. The Bank expects that as these effects fade, inflation will return to
'close to' 2% by the middle of next year.
- The areas of the economic expected to drive growth this year
have shifted. Consumption is expected to play a larger role, while net trade is
now expected to act as a drag on the economy. The Bank continues to expect
housing activity to support overall growth this year, with a softer performance
- As always, the risks to the inflation outlook were
discussed. Top of mind for the Bank of Canada is the potential for softer than
expected inflation, both globally and in Canada. Also flagged were the
possibility of weaker exports and business investment than expected, stronger
consumption and rising household debt, a better than expected U.S. growth path,
and a house price correction in key Canadian markets.
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- A sudden and dramatic change in the tone of the Bank's
communications early last month had markets expecting a rate hike, and the Bank
delivered today. While the Bank rightly sees a stronger near-term growth
outlook, it also sees a meaningful turn-around in inflation over the coming
quarters. The statement pointed to temporary factors that are seen as holding
back inflation, as recent statements suggesting that the current softness in
price growth was a reflection of past economic setbacks were downplayed
somewhat. This explanation is somewhat curious given the weakness in the Bank's
3 measures of 'core' inflation, which should by definition remove the impact of
temporary and/or idiosyncratic influences.
- Indeed, the path for inflation is likely to be the key risk
for the Bank, underscored by both the introduction of weak inflation as a risk
to the outlook, and its placement at the top of the list. That said, Governor
Poloz has made it clear that barring a materialization of this risk, Canadians
can expect more rate increases to come.
- TD Economics view was that while the macroeconomic backdrop
supported a tightening of monetary policy, the inflation outlook did not.
Clearly the Bank of Canada is placing more weight on the growth side of things.
- In the press conference this morning, Governor Poloz
suggested that the Bank's thinking regarding the path forward cannot be slotted
into the categories of either removing the 2015 stimulus, or striving to
normalize interest rates. As such, we believe that another rate hike is likely
at the Bank of Canada's October monetary policy decision, but a slightly slower
pace of one 25bp hike every six months or so is likely thereafter.
Brian DePratto, Senior Economist
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