Why the Bank of Canada may not need to hike until January
A slate of the nation’s top economists say that if given Stephen Poloz’s power, they wouldn’t increase interest rates at this Wednesday’s Bank of Canada meeting. Six of the 11 economists polled in the C.D. Howe Institute Monetary Policy Council’s latest report said they would hold on rates if given the choice, though the report does not reflect what those polled think the bank will do, only their preferred path for the central bank.
“A key tension underlying the split vote regarding the upcoming setting was the positive tone of many indicators of economic activity, accompanied by continued below-target inflation readings,” the report read. “Some members who voted for the Bank of Canada to hold its target at 0.50 percent said they expected the Bank to hike, but felt that a hike was premature in advance of a pick-up in inflation.”
Those polled, who hail from five of the nation’s top six banks and a number of universities, said they would largely prefer if the bank increases rates at the September meeting, though market participants are currently pricing in 93.1 per cent odds of a move later this week. The median rate path provided by the economists polled by C.D. Howe is for one rate bump in September followed by a pair of increases in 2018.
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C.D. Howe reported the group of economists are more concerned with maintaining stability through the financial markets than they are with inflation, which has remained stubbornly low amid weak oil and fuel prices.
“The dominant theme as the group looked further ahead was the improved breadth of Canada’s economic expansion, the decreased likelihood of deflation globally and domestically, and the desirability of moving the overnight rate toward a level consistent with steady growth at two percent inflation,” according to the report, which was released on Thursday. “However, uncertainty about the neutral level and how quickly the bank should aim to achieve it, combined with continued subdued inflation readings, led the group as a whole to favour a moderate pace of increases.”
One veteran Bay Street money manager told BNN on Monday he thinks the Bank of Canada risks losing credibility if it remains on hold this week after so much recent hawkish rhetoric. J. Zechner Associates Chairman and Founder John Zechner said he expects Poloz to pull the trigger this Wednesday, as central bankers have leaned towards telegraphing moves in recent years.
“I expect they would go just for the simple reason that transparency seems to [have] become the buzzword for central bankers in the past couple of years,” he said. “What they realize they don’t like doing is surprising markets. That’s where you get more volatility from.”
Zechner said his view was not based on any material improvement in the underlying economic data, but due to the overwhelming market expectation for a rate increase.
“I don’t think the economic data or anything has changed that dramatically, and I can see why the economists haven’t changed [their view] on that basis, but it’s hard to ignore when you see these probabilities, because of what they’ve said go from almost zero to 90 per cent in a matter of weeks,” he said. “They’ve laid the carpet for this.”
“We have crisis-level interest rates globally, and you’re not in an economic crisis anymore.”