We expect the Bank of Canada to raise interest rates 25 bps at the July 12 decision, the first move of any type in two years and the first rate hike since 2010.
While there are good arguments on both sides, we (and apparently the Bank) believe that the surprisingly robust turnaround in GDP and employment growth in the past year justify a rate hike. With the economy now expected to expand 2.8 per cent this year (versus a consensus call of about two per cent at the start of the year), the output gap is closing rapidly, pointing to upward price pressures next year.
The one major quibble on the move would be the fact that oil prices continue to struggle to stay much above US$45 per barrel, keeping a lid on inflation and presenting an ongoing risk to the nascent recovery in Alberta.
However, financial stability concerns (hot housing, rising household debt) are at least as great a risk on the other side. We have been urging a change in first tone and then policy from the Bank for months, and on net we believe a rate hike is not only likely but also the appropriate course of action at this point.
Doug Porter'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.