The consensus about an October interest rate hike is long gone, with some analysts now predicting the Bank of Canada will stand pat this week as it waits and sees how the economy fares over the fall.
Avery Shenfeld, chief economist at CIBC Capital Markets, suggested Friday that the central bank may have trouble processing the end of NAFTA, if that were to occur, as well as judging the impact of new and tougher rules for uninsured mortgages and the growth and inflation effects of the coming minimum wage increase in Ontario.
Shenfeld also noted that the economy’s performance in the wake of the Bank of Canada’s September rate hike won’t be fully understood until March 2018, given the “data lags.”
“So the only logical conclusion is that the Bank of Canada will simply have to wait and see whether growth and inflation trends compel a further tightening,” Shenfeld wrote. “If the Bank needs to ‘monitor’ how the economy is doing with higher rates and other changes in the landscape, we won’t see the next rate hike until the Spring of 2018.”
The Bank of Canada’s next interest rate announcement is set for Wednesday. It will follow consumer price index figures for September that showed inflation rose 1.6 per cent on a year-over-year basis, driven by a 14.1 per cent jump in gasoline prices influenced by Hurricane Harvey.
The Canadian dollar has also gained in value against its American counterpart, shooting up above US 80 cents about the time of the September rate hike, before hovering around that level in recent weeks.
Bank of Canada Governor Stephen Poloz said last month that there “is no predetermined path for interest rates from here.”
“Monetary policy will be particularly data dependent in these circumstances and, as always, we could still be surprised in either direction,” he said, according to a release.
At the end of August, after July’s quarter-point rate hike by the Bank of Canada, Capital Economics said that futures contracts were indicating a 77 per cent chance of another hike in October. At the same time, Capital said the markets were suggesting a 23 per cent probability of a rate hike in September, which is when the rate hike actually occurred.
Capital said Wednesday that the futures market is now putting the chance of an October quarter-point hike at only 22 per cent. Like Shenfeld, Capital economist David Madani said the economic outlook “has become cloudier lately,” thanks to the “souring” NAFTA talks and heightened risk in the housing market.
“Accordingly, we no longer see any further interest rate hikes this year,” he added.
Despite outpacing the 1.4 per cent growth seen in August, Capital Economics noted Friday that the September rate was still below the Bank of Canada’s target.
TD Securities said inflation, plus a 0.3 per cent drop in August retail sales reported Friday, could play into the central bank’s thinking as well.
“Overall, the dual reports take the pressure off the October meeting but in our view should keep rate hike expectations alive going forward,” it said.
Derek Holt, head of capital markets economics at Scotiabank, said the inflation figures showed “slightly further progress” towards the Bank of Canada’s target, but that “all data, however, risks exaggerated reactions in the face of NAFTA risks.”
“No policy rate change is expected,” he said of Wednesday’s meeting in another note. “While we continue to forecast a hike in December, I have reduced confidence in such expectations.”