Investors may be betting on a hike next week when the Bank of Canada releases its interest rate decision, but some of Canada’s leading economists are conflicted about whether now is a good time to raise the cost of borrowing.

"I suspect it will be a closer decision than the market seems to be expecting in recent days," said Douglas Porter, chief economist at BMO Financial Group, in an email to BNN Bloomberg, noting he expects the central bank to raise rates by 25 basis points to 1.5 per cent.   

The last time the Bank of Canada raised rates was in January, following back-to-back increases in 2017. The bank held its overnight target of 1.25 per cent at its last meeting in May, citing trade policy uncertainty for clouding the outlook. As of Friday morning, the market was pricing in an 87.5 per cent chance that the bank will raise its main rate next week.



NOT HEADLINE-DEPENDENT

In spite of the mounting uncertainty around trade, Bank of Canada Governor Stephen Poloz has indicated he won’t be swayed by the headlines. In his last speech before the July rate decision, Poloz indicated the bank remains data-dependent.   

“We make policy on the basis of how the data evolve," he told reporters in Victoria, B.C. on June 27.

"While Governor Poloz indicated that they make policy on the economic data and not the headlines  –  the key point from last week’s press conference – the reality is that the data have been on the soft side overall for much of the past one to two months," Porter said.  

Canada’s economy showed unexpected weakness with sluggish readings for inflation and retail sales in the second quarter; however, there was surprising strength in April with GDP expanding 0.1 per cent from the prior month. And in the last reading of the economy before Wednesday’s rate decision, Statistics Canada reported the country added 31,800 jobs in June amid a surge in part-time work.  

The strong GDP number was “enough to check the box for the Bank of Canada and a July rate hike,” Frances Donald, senior economist with Manulife Asset Management, told BNN Bloomberg in a recent interview.  

CIBC Capital Markets Chief Economist Avery Shenfeld said in a note to clients the overall details of Friday’s jobs report weren’t great, but the numbers are “good enough” for the central bank to raise rates next week.  

Don't expect a Bank of Canada hike until at least October: Economist

Stéfane Marion, chief economist and strategist at National Bank, gives his outlook for the Bank of Canada interest policy.

‘WHY PULL THE TRIGGER NOW?’

Another one of Canada’s top economists is looking past the data, urging the Bank of Canada to consider trade uncertainty and hold rates steady.

"I think this is one of the rare instances where you could argue that given this uncertainty out there, why would you proceed with a rate hike if things turn from bad to worse later this summer?”, Stéfane Marion, National Bank's chief economist and strategist, said in an interview with BNN Bloomberg Tuesday.

"Why pull the trigger now? [Particularly] when there seems to be this potential trade war between not Canada and the United States, but China and the United States," he added. 

Porter said the trade uncertainty puts the central bank in a difficult position. 

“Given the deepening uncertainty around trade, it does put the BoC in a tough spot, but the bank has to stick to what it knows for certain; and it knows that the jobless rate is the lowest in four decades, that wages are rising almost four per cent year-over-year, that core inflation is almost right on target, and that lots of firms are reporting that they are running out of capacity,” he said. 

“There will be a lot of moving parts in this announcement, but — assuming they do hike — most will be looking for signs whether the bank is signalling a temporary move to the sidelines, or whether it’s onward and upward." 

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