BoC officials set the stage for a 12 July rate hike – HSBC

David Watt, Chief Economist at HSBC, suggests that they now expect the Bank of Canada to raise is policy rate by 25 basis points on 12 July and further expect the Bank to raise rates by another 25 basis points on 25 October.

Key Quotes

“These moves would lift the Bank of Canada’s policy rate to 1.0% by year end 2017. The 50 basis point increase in the policy rate would reverse the easing steps from 2015 that were aimed at offsetting the decline in oil prices in late 2014.”

“Since mid-June, developments have tipped the balance toward earlier moves by the Bank of Canada. First, senior BoC officials have questioned whether the current degree of stimulus is appropriate. Their hawkishness remained consistent even as the market moved to price in an 88% likelihood of a rate hike on 12 July, suggesting, in our view, some comfort with the market’s interpretation of their statements.”

“Second, the Bank of Canada’s Summer 2017 Business Outlook Survey (BOS) showed that businesses were very confident about future sales growth, employment, and investment. In particular, a record 66% of firms plan to increase employment over the next 12 months.”

“Markets also responded forcefully to the change in BoC communications. Since 9 June, the Canadian dollar has been the best performing currency and the 2-year Government of Canada bond yield has increased by 39 basis points to over 1.1%.”

“Despite bringing forward our projection for Bank of Canada rate hikes, we think that the Bank will leave the policy rate at 1.0% through 2018. Factors justifying a cautious approach to raising rates further include declining core inflation, expectations that inflation will remain low, and weak wage growth despite strong job creation. Also, despite better survey results, we do not see exports or business investment as providing the type of support necessary for sustainable medium-term economic growth. In our view, the Bank will await signs of sustained improvement in nonenergy exports and business investment before raising rates beyond 1.0%. Additionally, we harbour concerns about the impact of higher rates on financially vulnerable households and firms.”