Interest Rates

BMO economist says the Bank of Canada is going to hike interest rates on July 12

By: Dominic Licorish on June 28, 2017

BMO Capital Markets says it now expects the Bank of Canada to hike interest rates in two weeks after governor Stephen Poloz told CNBC that rate cuts “have done their job” and that they need to “consider that whole situation now” going into July’s rate decision.

Benjamin Reitzes, strategist at BMO Capital Markets, says he expects the central bank will raise the key interest rate by 25 basis points at its meeting on July 12, taking the rate from 0.5% to 0.75%. Beyond that, he thinks we could see another 25 basis point hike in January of next year, but that it could also happen in October. Either way, this would be the first rate move since interest rates were cut in 2015.

“It does look as though those cuts have done their job,” Poloz said in his interview with CNBC. “We’re just approaching a new interest rate decision, so I don’t want to prejudge that, but certainly we need to be at least considering that whole situation now that capacity—excess capacity—is being used up steadily.”

He doesn’t come right out and say it, but his language suggests a serious consideration of hiking the rate. In Reitzes’ analysis, the major factor in calling for the rate hike is the fast growing GDP and job market — although he speculates that mitigating the risks of our high debt levels and overheated housing markets is probably also on the BoC’s mind.

With the oil price shock over, one of the major factors forcing the central bank to keep rates low is gone. The last remaining hurdle is Canada’s downtrend in Consumer Price Index (CPI). Canada, like much of the developed world, continues to struggle with weak inflation.

However, if the economy continues to perform as expected, CPI should trend upwards again as consumer demand strengthens.