Interest Rates

There could be as many as three Bank of Canada rate hikes in 2018

By: Jessica Mach on January 9, 2018

The new year is off to a good start for the Canadian economy, with a low unemployment rate, strong job growth, and a robust dollar. For many financial experts, all this good news is likely to lead to one thing: an interest rate hike by the Bank of Canada.

The BoC carries several responsibilities — one of which is to manage inflation. When the nation’s economy is strong, the BoC raises interest rates to slow demand. When the economy has slowed too much, the BoC will lower rates to boost consumer spending. The Bank is set to make its next rate announcement next week, on Jan. 17.

Right now, the economy is faring well. On Friday, Statistics Canada released a labor report which showed that 79,000 jobs were created nationally in December 2017. In that same month, unemployment fell to 5.7% — the lowest rate since at least January 1976.

December was the third consecutive month to see employment increase across the country.

All of this makes a strong case for the BoC to hike interest rates. In December, the Bank left its benchmark rate unchanged at 1%. At that point, StatCan had only just released November’s labor report, which showed the beginnings of an upward trend in job growth.

Now that the trend looks to be continuing, the factors that might have made the BoC reluctant to hike rates — like upcoming NAFTA negotiations and the effects of OSFI’s mortgage stress test — may not be enough to hold the Bank back.

“Sometimes we are admittedly prone to rhetorical flourishes on the economic data, with even occasional lapses into exaggeration, but there is no exaggerating the December jobs report,” said Douglas Porter, cheif economist and managing director at BMO Financial Group. “The 78,600 rise in employment lifted the three-month gain to 193,000, the swiftest in more than 40 years.”

Porter continues. “Prior to the figures, the market reckoned there was roughly a one-third chance the Bank would hike at its January 17 meeting, and was almost fully priced for a rate hike by the March meeting… Post jobs data, the odds leapt to more than a two-thirds chance of a January hike, with even a small chance of a follow-up move in March, and — importantly — now priced for slightly more than three rate hikes for all of 2018.”

If there's three rate hikes, that means that the benchmark rate could be brought to 1.75% — the highest it's been since 2008.

TD’s senior economist Brian DePratto agrees that a rate hike next week at least is more than likely.

“The picture that emerges is one of economic strength,” he writes in a TD outlook report published Monday. “Today's report should thus provide Bank of Canada Governor Stephen Poloz with further confidence that emergency level interest rates are no longer needed, with the next policy interest rate increase to come next week.” 

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