Interest Rates

Could the Bank of Canada hike rates again in December?

By: Jessica Mach on October 29, 2018

The Bank of Canada hiked its overnight interest rate for the fifth time since July 2017 last week and another hike could come as soon as December, some financial experts say.

Most experts correctly anticipated the Bank of Canada’s (BoC) rate hike on Oct. 24, but fewer people expected the announcement to be so “hawkish” — e.g., using language which suggests Canada is in need of higher interest rates.

The BoC’s rate announcement noted a few reasons for more hikes in the near future. These included the end of NAFTA negotiations (the deal has since been renamed the United States-Mexico-Canada Agreement, or the USMCA), strong income growth, and rising inflation.

Douglas Porter, chief economist at the Bank of Montreal, said that the USMCA in particular “is a major relief for Canada, lifting a heavy cloud of uncertainty from the outlook.” He noted that BMO is now calling for three rate hikes in 2019, in January, April and July.

But some people are not so convinced that higher rates are critically needed.

In a report last week, CIBC’s Avery Shenfeld said he was surprised that the BoC’s tone was as urgent as it was. Besides the finalization of the USMCA, he wrote, “there's nothing in evidence to support what was a much more hawkish tone from the central bank on what lies ahead.”

For now, the market will run with the view that December is a "live" meeting with a decent chance of a rate hike, and will be tempted to pile on more rate hikes into the 2019 view

He added that while the USMCA “lifted part of the headwind to growth,” other factors — like only a fraction of the country’s mortgages being renewed at higher rates — are not exactly pushing economic growth so quickly as to justify a series of urgent interest rate increases.

Nonetheless, Shenfeld sees hikes in the future — maybe even as soon as the BoC’s next rate announcement on Dec. 5.  “For now, the market will run with the view that December is a ‘live’ meeting with a decent chance of a rate hike, and will be tempted to pile on more rate hikes into the 2019 view,” he wrote.

Experts are mostly fixating on the BoC’s statement that its overnight interest rate “will need to rise to a neutral stance to achieve the inflation target” — a stark contrast to the bank’s previous position, which advocated for a “gradual” hike. The gradual language was removed for the first time in the last announcement.

The previous interest in gradual changes, as opposed to last week’s insistence on a more urgent “rise,” was considered to be a more “dovish” stance — e.g., a more lenient approach to financial policy.

Financial policy can usually be characterized as either hawkish or dovish. The approach that government institutions like the BoC chooses is based on how the Canadian economy is doing. When the economy needs to be stimulated, institutions will favor dovish policies to encourage spending. When the economy is doing well, hawkish policies can help rein in reckless growth.

The BoC’s choice to use a hawkish tone last week suggests that its overnight interest rate will no doubt increase again very soon. 

 

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