“The biggest question heading into the BoC’s Wednesday meeting is: What has changed between the BoC’s balanced and neutral policy statement of May 24 and the BoC’s significant hawkish tone that began on June 12?

There are certainly a lot of reasons one can use to justify an interest rate hike: the economy is accelerating, the labour market is gangbusters, and the worst of the oil crisis appears to be behind Canada. Yet these factors have been in place since the beginning of the year, if not earlier.

Importantly, the reasons to postpone a hike are also still very much in play: inflation is decelerating, wage growth is slow, Ontario housing is cooling, and there is heightened policy uncertainty emanating from the United States. In brief, there have been only marginal changes to the economic outlook over the past few months, with most economic data coming in as the Bank of Canada had previously forecast.

Perhaps the BoC is more concerned about financial stability than they have let on. Or maybe the BoC has been motivated by the global shift in central banker tone. Concerns about NAFTA-related risks may have diminished. It’s also possible that the BoC’s internal models are flashing red on concerns about upside inflation within the next two years.

The Bank of Canada will likely hike rates on July 12, but what matters more is how they will describe the evolution of their thinking. The better we can understand what prompted the apparent shift in the BoC’s decision-making function over the past month, the more likely we are to understand where rates are headed next.”

Frances Donald's comments were provided to BNN to preview this week's Bank of Canada interest rate decision. Check BNN.ca over the next two days for more commentary from Canada's top economists.