These folks seem to agree the speed of interest rate hikes will be slower than earlier predicted.
The Bank of Canada surprised almost no one when it hiked its key interest rate 25 basis points to 1.25 per cent Wednesday.
The central bank’s tone, however, was more dovish than many economists were expecting.
So where do rates go from here? Canada’s top economists weigh in:
DAVID ROSENBERG, CHIEF ECONOMIST GLUSKIN SHEFF
Those who had been forecasting three more moves this year did not receive much reassurance in what was a fairly dovish press statement. The Bank did say that higher rates would be needed over time, but there was absolutely no sense of urgency at all on this score … Another hike, let alone two or three, is hardly baked in the cake.
AVERY SHENFELD, CIBC CHIEF ECONOMIST
• One further hike this year, early in Q3, and a further 50 bps in 2019
“Today’s rate hike was a rear-view mirror move, but the Bank of Canada hints that the view out the front window isn’t quite as sunny. Canada did so well in 2017 that it left little slack in labour markets or capacity in its wake, easily justifying a quarter-point hike today. The output gap is now slightly positive, so quarterly growth rates from here have to average below 2 per cent (the Bank has 1.8 per cent for the average of the next four quarters) to avoid an inflationary overheating.We share the Bank of Canada’s view that higher rates will be needed over time to stay on that path, but they won’t come quite as fast and furious as the market was starting to think. For one, the Bank’s statement put NAFTA uncertainties right up front, and has started to build in a drag on investment and exports into its forecast. While the Bank isn’t ready to assume that NAFTA will be completely cancelled, doubts on that front can impact business sentiment, and they’ve included a 0.5% hit to the level of GDP through the next two years to account for that effect. … Overall, this was a dovish statement relative to the minimum degree of optimism needed to justify a rate hike today, and could put some downward pressure on 2-year yields and the value of the C$. We’re looking for one further hike this year, likely early in Q3, and a further 50 bps in 2019. Yes, we’re facing higher rates, but not SO fast given other risks to growth ahead.
MARK CHANDLER, RBC DOMINION SECURITIES, HEAD OF CANADIAN RATES STRATEGY
• Three more hikes to leave the overnight target at 2% by the end of 2018
Overall, the “cautious” catchword from the BoC remains in place even with today’s hike and this may be how additional moves later this year pan out (we expect three more to leave the overnight target at 2.00% by the end of 2018). We concur with the Bank’s assessment that “some accommodation will likely be needed to keep the economy operating close to potential and inflation on target” and we believe that the Bank will need to slow the pace of rate hikes in 2019 (we currently have the overnight rate holding at 2.25%, below the 3.00% mid-point of the Bank’s estimated neutral rate range, largely reflecting the impact of higher rates on high household debt).
DOUGLAS PORTER, BMO CHIEF ECONOMIST
• Sticking with prior call of two more hikes in 2018, ending the year at 1.75 per cent, but next hike not until July
While the move was no big surprise (markets had assumed a greater-than-80% chance of a rate hike), the initial read on the commentary leaned a tad dovish, with the Bank re-stating that they would be “cautious” in future rate moves, putting the NAFTA risk front and centre, and suggesting that “some continued monetary policy accommodation will likely be needed”. Having said that, the dovish remarks did not run the table, as they nudged up their growth forecasts for the next two years, and actually sounded a bit positive on non-auto exports …By making NAFTA risks so prominent in this Statement, rate hike odds will now ebb and flow with the negotiations, even moreso than earlier. One new possibility is that the talks could be put on ice for a spell until after the mid-year Mexican election; if that’s how it indeed plays out, then the Bank could get on with its business sooner.Bottom Line: Combined with lingering uncertainties around NAFTA and the housing market, we suspect the Bank will take a bit more time before hiking again. Barring another run of roaring data, we look for the Bank to hold off until possibly July before hiking again (depending, of course, on the fate of the NAFTA talks). But, big picture view, we remain entirely comfortable with our prior call that the Bank will hike two more times in 2018, ending the year at 1.75%.
DAVID MADANI, SENIOR CANADIAN ECONOMIST, CAPITAL ECONOMICS
• Hike in spring, probably April, followed by a rate cut before year-end
The Bank of Canada’s … more upbeat economic outlook suggests that it will hike rates again later this year, probably in April. In contrast to the consensus, we wouldn’t bet too heavily on further rates hikes beyond the spring, however. The economy is still heavily dependent on housing and debt which, we still firmly believe, will eventually upend the economy and prompt a reversal in monetary policy before year-end.
BRIAN DEPRATTO, TD ECONOMICS SENIOR ECONOMIST
• Gradual pace of tightening is most likely, with the next hike penciled in for July
Emergency level rates may not be needed, but that doesn’t mean that the Bank is in a rush to continue hiking. NAFTA uncertainty hangs over the outlook, with the Bank explicitly downgrading the outlook for business investment and trade to account for the impact of negotiations. What’s more, despite the positive run of labour market data, wage growth remains weaker than the Bank had expected. Most explicit was the statement that while the outlook will likely “warrant higher interest rates over time, some continued monetary policy accommodation will likely be needed”. As such, it remains our base-case view that a gradual pace of tightening is most likely, with the next hike penciled in for July. Data dependency of course means that this is not a lock. Developments in Poloz’s list of areas to watch, including interest rate sensitivity, labour market developments, and inflation dynamics could easily bring the next hike forward, or push it back.