Will the Bank of Canada announce another mortgage interest rate hike at next week’s October 25 monetary policy report and interest rate announcement? If the national bank does, it will be third, consecutive rate increase this year after seven years of stagnant rates.
Where do the economists stand?
Economists are divided. Only six out of the 29 economists polled by Bloomberg predicted last month’s rate increase—the second, consecutive increase to the overnight target rate in just seven years.
Part of the problem is how ambiguous Canada’s economy can be, a fact Bank of Canada Governor Stephen Poloz addressed during his September 27 speech in St. John’s, Newfoundland. During the speech, the BoC governor highlighted how complex the economic adjustments were during the 2014 oil price shock and how the BoC’s monetary easing in 2015 helped the country to pull out of that economic slump. But the country’s No. 1 banker learned from this situation and, as a result, does not see a clear path ahead for the bank or its policies. As he stated:
“There is no predetermined path for interest rates from here. Monetary policy will be particularly data dependent in these circumstances and, as always, we could still be surprised in either direction. We will continue to feel our way cautiously as we get closer to home, fostering economic growth and keeping our inflation target front and centre.”
Economists argue for no additional rate increase in 2017
According to most of the big bank economists, a third, consecutive increase in Bank of Canada interest rates this October would only suppress an economy that only just hit its stride early this year. Even a small increase would help strengthen an already strong Canadian dollar, which would hurt Canadian exporters and the overall economy.
As a result, CIBC economists Avery Shenfeld and Benjamin Tal, both of whom head up the bank’s Market Call analysis, suggest that the BoC wait until June 2018 before any additional increases to the overnight rate. Shenfeld argues that skipping a rate increase would allow the BoC to monitor how Canadian households are coping with the rising cost of debt—an “unknown” that clouds the outlook for inflation, according to Poloz.
Foreshadowing suggests no rate increase on October 25
While Poloz is not known for forecasting the bank’s policy moves—a stance he has been criticized for in the past—there’s been some foreshadowing on what to expect at next week’s interest rate announcement.
Canadian rates and macro strategist at BMO Benjamin Reitzes points out: “The more subdued tone of the [latest BoC Business Outlook] survey highlights that there’s no rush for another hike from the Bank of Canada. However, building capacity pressures and still positive expectations (even if more subdued) point to continued rate hikes, just at a more cautious pace than we’ve seen so far.”
Poloz, himself, seems to support Reitzes’ perspective. The BoC governor spent part of last Saturday talking to reporters in Washington, DC, where he was attending International Monetary Fund meetings. According to the Toronto Star, Poloz described Canada’s economy as entering the “sweet part” of the business cycle—where the economy can grow quickly without triggering inflationary pressure. He added that “inflation models” are not broken and “they’ve always done a good job and continue to do a good job.”
This could mean that the BoC intends to continue targeting maximum economic capacity based on a 2% inflation rate (or, more precisely, between 1% and 3% inflation target rate); it also means that if there is no pressure on the nation’s inflation rate, the bank can hold the overnight steady at 1%—delaying the next mortgage rate increase until Dec 6, at the earliest, or even pushing it into 2018.