BoC likely to raise overnight rate by 25bps next Wednesday, says Scotiabank

The Bank of Canada (BoC) is expected to raise its overnight rate by 25 basis points at its next meeting on September 6 and maintain a neutral-hawkish bias in a nod to how there are further hikes to come beyond simply unwinding the two 25bps cuts in 2015.

Growth has been far exceeding the Bank of Canada’s forecasts for an extended period. The Canadian economy has grown by 4.2, 2.7, 3.7 and 4.5 percent from Q3 2016 to Q2 2017, respectively. That translates into a four quarter average growth rate of 3-3/4 percent which far exceeds the experiences of Canada’s developed economy peer set. One might quip that Canada has achieved US President Trump’s wish of 4 percent growth for his own country.

The BoC has not set up markets and consensus for a September hike and has been rather quiet of late. However, the BoC didn’t feel much compelled to provide such a set-up when it shocked markets in June and the forecast guidance in the July MPR leans toward continuing a hiking cycle, Scotiabank reported.

Without rate hikes, there is a risk that inflation will overshoot its target for an extended period of time. Export growth is benefitting from past adjustments to the smoothed level of the currency and from income growth abroad particularly in the US economy which appears to be continuing into Q3. There are enough areas of strength in the Canadian economy to offset the effect of rate hikes on the interest sensitivity and still result in moderated growth.

"We believe the central bank remains on the path toward raising its policy rate by about one full percentage point by the end of next year in a more front-loaded set of moves and likely more increases than priced in by markets through 2018," the report said.

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