The Bank of Canada is probably done raising interest rates this year, a Reuters poll of primary dealers showed on Thursday, although the central bank is viewed calculating a more aggressive tightening path for 2018 than was expected.
The Bank of Canada amazed many with a speed increase on Wednesday, its second this season, and left the door open to additional hikes amid strong economic growth that has made Canada a leader among its industrialized peers.
The median forecast among 10 of Canada’s 11 key dealers that deal directly with the Bank of Canada at debt auctions is for the central bank to wait until the first quarter of next year to increase again. That will provide the central bank time to learn how its two back-to-back rate hikes are consumed by the market in addition to heavily indebted consumers.
There’s a risk the bank could raise rates for a third time in 2017 if economic data has been strong, forecasters said, with four key dealers expecting the bank will increase again in the fourth quarter.
“It really very much depends upon how the information pan out within the next six months or so,” said Benjamin Reitzes, senior economist at BMO Nesbitt Burns.
Though BMO expects the central bank’s next move to be in the first quarter of 2018, additional strong performance from the Canadian market would mean “that the door is wide open for October, obviously,” Mr. Reitzes said.
Respondents place the median probability of the lender trekking at its second meeting in October in 30 percent, roughly in line with market chances of 35 percent.
The Bank of Canada’s overnight rate is now seen increasing to 1.75 percent by the end of next year, 25 basis points higher than economists had anticipated by that time in a broader Reuters poll done last week.
How quickly the Bank of Canada can increase rates in 2018 will also be based on the Federal Reserve being in tightening mode next year, economists said.
If the U.S. central bank isn’t raising rates at precisely the exact same time, that could drive the Canadian dollar up too far and undermine the economic outlook, said Stéfane Marion, chief economist at National Bank Financial.
“The Bank of Canada is going at it alone where the Fed appears to be sidelined for now, which is unusual,” Mr. Marion said.
Dovish comments from Fed policy-makers earlier this week decreased the likelihood of another rate hike south of the border this season in the middle of weak inflation data.
The Bank of Canada will want to wait to see what the Fed does this season until it decides to proceed again, said CIBC Capital Markets senior economist Andrew Grantham, who expects the bank to pause until the next quarter of 2018.
“Our view remains that they will take it slow, and the reason we expect that though the announcement was kind of on the hawkish side is the Canadian dollar has appreciated a long time,” Mr. Grantham said. “That adds to the slowing effect these rate hikes will have on the market.”
The Canadian dollar has gained nearly 10 percent against the greenback this year, including a nearly 2-per-cent jump because Wednesday’s rate increase.
For the time being, however, the Bank of Canada seems to be less worried about a stronger Canadian dollar than it’s been previously, Mr. Marion said.
While the lender noted the current appreciation of the Canadian dollar in its statement on Wednesday, it said the gain in part reflected the strength of the Canadian market.
“It seems as though they’re not as currency-focused than they were previously in that announcement,” stated Mr. Marion, who anticipates a rate hike in December.
Courtesy: The Globe And Mail