Here's why BoC might hold off raising rates despite all signs pointing to another hike
It was long in coming, seven years in fact. And now there are signs the next upward push on interest rates could still be farther down the road than first thought, despite a mostly improving economy.
The Bank of Canada has already taken some flak for raising the cost of borrowing just as the economy is firing up — with some analysts cautioning against taking too much stimulus out of the system too soon.
Granted, the July 12 rate increase, the first since 2010, had a long runway for take off.
Governor Stephen Poloz and other central bank officials were out in the field early and often talking up the economy. It was obvious to the markets and to business groups what was coming. It was just the timing and quantity that were in question.
Now, it’s a matter of whether the economy can continue to deliver the goods that prompted the bank to push up its trendsetting lending to 0.75 per cent from 0.5 per cent.
So far, the pace of expansion in Canada’s gross domestic product is proving even stronger and more resilient than cautious critics would have dared forecast. In fact, the economy has not been this strong since October 2000, when year-over-year growth topped out at 4.7 per cent.
“GDP growth over the past year has been above four per cent. If that doesn’t inspire faith in the economy I don’t know what will,” said Benjamin Reitzes, senior economist at BMO Capital Markets.
“I understand the caution, given the past seven years (without a rate increase), but slow and steady rate hikes make a lot of sense – assuming the economy continues to grow at a decent, above potential, pace.”
The question is: Should Poloz and his policy team sit on their hands for now or entertain at least one more rate increase in the coming months?
The next scheduled rate decision is Sept. 6, followed by another meeting on Oct. 25, this one accompanied by the bank’s quarterly Monetary Policy Report, which will provide updated economic numbers and forecasts. The Dec. 6 meeting will offer the final chance of the year to adjust the key lending level.
“The uncertainties coming out of the U.S. — political and economic — loom large for Canada,” said BMO`s Reitzes. “I think it’s clear that the (Canadian) economy is in good shape at the moment, but elevated (household) debt burdens make the impact of rate hikes uncertain — a good reason to go slow — and the Canadian dollar’s recent gains could be a headwind for growth.”
For now, the Canadian economy is continuing to show renewed resilience.
On Friday, Statistics Canada reported the country`s unemployment rate eased by 0.2 percentage points to 6.3 per cent in July as10,900 net positions were added.The jobs report closely matched forecasts by analysts and marked the eighth consecutive monthly gain in hiring.
“This is the lowest rate since October 2008, just prior to the onset of the 2008-2009 labour market downturn,” the federal agency noted.
Monthly economic data aside, Avery Shenfeld, chief economist at CBC World Markets, said “the real” issue still lies ahead: “How quickly to do follow-up hikes.”
“Given how much the Canadian dollar has moved on the first step and its impact on exports and inflation, the risks that the U.S. Fed will delay its own rate hikes and thereby send the loonie even stronger – and the heavy stock of household debt that these rate hikes will impact – (this) all suggest that the Bank of Canada should take its time,” says Shenfeld.
“It could signal that by holding rates steady in September, and waiting until the market is expecting a matching near-term U.S. rate hike so that the Canadian dollar doesn’t overshoot. “
Source: Financial Post
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