If the economy doesn’t need rates this low to make solid progress, for financial stability reasons, a hike is warranted. Why encourage excessive debt, and add to the risks that rate hikes down the road will lead to unpleasant surprises?
We’ll trade off a bit of a delay in getting to sustained two per cent inflation if that helps cool Canadians’ debt appetite. Solid economic data make it likely that the BoC will indeed go ahead with a hike this week. That still isn’t a sure thing, even though the financial market sees it that way.
The market failed to expect the first rate cut in 2015, and priced-in a rate cut that didn’t end up happening in early 2016. A second hike will likely see the overnight rate back to one per cent by year end. Since the Fed will also hike once more, we should be done with this year’s lift to the loonie from the change in BoC policy.
In 2018, look for only a slow crawl higher with a BoC hike every six months or so. Elevated household debt levels, coupled with a tightening in mortgage and housing policy, suggest that fewer rate hikes will be needed than in the past to cool the economy’s fires.
Avery Shenfeld's comments were provided to BNN to preview this week's Bank of Canada interest rate decision. Check BNN.ca over the next two days for more commentary from Canada's top economists.