“Our forecast is for three 25-basis-point rate hikes starting on July 12 and then in October and Q1 of 2018.
This would reverse the two rate cuts in 2015 following the collapse in commodity prices and that simply heated up housing. It would add more hikes to a) account for the fact that disinflationary spare capacity is largely shut and b) to acknowledge upside risks to the economy. A pure modelling approach would predict 100bps of hikes over 2017-18.
Canada is well past having to cling to emergency levels of monetary stimulus that date back to the 2009 recession and accompanied by very easy financial conditions. While there are risks to the outlook, many of them are overstated and monetary policy cannot be held hostage by a permanent array of ‘what-ifs’. NAFTA has not been torn up. A border tax is dead. Soft present core inflation is less of a caution at the BoC’s emergency levels than at the Fed which has hiked four times.
There is growing evidence that exports and investment can fill in for housing. And, yes, Toronto housing is stumbling of late, but this is likely temporary and it’s not all about Toronto as elsewhere is resilient and jobs gains are very strong.
Further, rule changes build-in a rate shock buffer in mortgage approvals which limits the impact of higher mortgage rates.”
Derek Holt'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.