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Reaction to BoC rate hold, what next?

 

by Steve Randall06 Sep 2018

The decision of Bank of Canada governor Stephen Poloz to hold interest rates steady in September was no big surprise.

The markets and economists had been expecting that freeze due to inconclusive economic data and the ongoing NAFTA talks.

But what do two leading economists make of the decision and how do they see things progressing for interest rates?

“It was wise of the Bank of Canada to hold its powder dry at today's policy meeting given the continued uncertainty on the NAFTA front,” commented Dr Sherry Cooper, chief economist for Dominion Lending Centres. “An agreement on NAFTA would provide the central bank with more comfort in moving ahead with a hiking cycle that has already lifted the benchmark overnight rate four times since mid-2017.”

She notes that the BoC acknowledged that a spike in inflation (to 3%) was largely driven by air fare hikes and the CPI is expected to return to near 2% early in 2019.

However, TD Economics senior economist Brian DePratto says that a rate hike could still have been justified by the rise in inflation despite its temporary nature, but he agrees that NAFTA is the key issue that prompted the hold-steady.

“Barring a major shock, an October hike looks like a pretty safe bet, but after that the picture becomes murky. The Bank has been marking down its growth outlook to account for trade uncertainty – any resolution on the NAFTA front is thus likely to mean a stronger outlook, and by extension, a faster pace of hikes, all else equal,” DePratto said.

Dr Cooper is in agreement, although sounds a less certain tone on an October hike: “The bank reaffirmed that the economy is doing well enough to require higher interest rates in the future to achieve the inflation target. Another rate hike could come as soon as the next policy meeting on October 24th.”

 
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