Interest Rates

Will the Bank of Canada hike rates at its January meeting next week?

By: Lisa Coxon on January 2, 2019

The Bank of Canada (BoC) is set to make its rate announcement next week, but after a tumble in oil prices and one of the worst years on record for the stock market, a January hike is now less certain.

A lot has changed since the BoC’s Dec. 5 rate announcement, when it maintained its overnight rate at 1.75%.

The U.S. stock market closed out 2018 with what the Associated Press called “its worst showing in a decade.” Major U.S. indexes were all in the red on the last trading day of the year. The S&P 500 closed out 2018 down 6.2%, while the Dow Jones Industrial Average fell 5.6%. Canada’s main stock index, however — the S&P/TSX — closed the year out higher, up 100.86 points at 14,322.90.

As of this morning at 11 a.m., the TSX was up 30.94 points at 14,353.80.

Alberta’s cuts to oil production took effect on Tuesday, after Alberta’s premier, Rachel Notley, ordered oil companies to temporarily slash 8.7% of oil production in 2019, which is equivalent to 325,000 barrels a day. Oil is one of Canada’s biggest exports.

The Canadian dollar is entering 2019 weaker than before, too. The loonie closed out 2018 at 73.30 cents (U.S.), a drop of 6.41 cents on the year, and its forecast for 2019 remains uncertain.

What does this mean for the January 9 rate announcement? Well, last year, most of the Big Banks’ economists were predicting three rate hikes for 2019: one in January, one in April, and one in July. Now, experts seem to be less certain of the plausibility of a January hike.   

RBC’s chief currency strategist, George Davis, told the Toronto Star that he now sees the Bank of Canada raising its key overnight lending rate twice this year, but probably not until the second and third quarters. That’s because there has been “some mixed news on economic statistics lately.”

For instance, in its Dec. 5, 2018 rate announcement, the BoC cited sharply falling oil prices, and a slowing global economy as reasons to pause any increases. But it also that said Canada’s housing markets and household credit were continuing to stabilize. Then, Statistics Canada revealed that we’re actually more in debt than previously thought.

“By design, the Bank of Canada’s policy report in January will assume oil prices stay range- bound,” said Avery Shenfeld, managing director and chief economist of CIBC Capital Markets, in a note from Dec. 21, 2018. “That makes a January rate hike implausible since the Bank will have to take a notch out of its growth projections.”

As for the loonie, Shenfeld said in a note a week later that the drop “doesn't yet pose a reason to lean hawkishly unless oil recovers and the Canadian dollar stays weak.”

“While rates won’t move up in January without a stunning oil turn in the next couple of weeks, it’s also hard to see Governor Poloz, who had little reason to be so confident in October, dropping all notion of higher rates ahead at some point.”