The markets are getting excited about an interest rate hike from an increasingly hawkish Bank of Canada.

As Governor Stephen Poloz and his deputies bash us over the head with warnings to that effect, here are three reasons in support of raising the central bank’s key overnight rate at the July 12 meeting, and three reasons not to hike.


3 Reasons to Hike

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  • The Canadian economy has been ripping along in 2017 and monetary policy should be forward looking. The BoC needs to look ahead 18 months to two years in terms of the economy reaching full capacity and what that means for the bank’s official mandate, inflation.
  • Canadians have pretty much ignored all the warnings about excessive debt with rates so low. As BMO economist Benjamin Reitzes put it, there’s likely a desire at the bank to “instill a bit more discipline in the housing market and borrowers.”
  • On a bleaker note, the bank might want some dry powder in the form of higher rates when the next recession arrives. That gives it the ability to cut in the face of an economic downturn without going into negative-rate territory.

3 Reasons to Hold

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  • Oil and inflation expectations have shown a fairly tight correlation. With crude in the mid-US$40 per barrel range and inflation currently quite tepid, the bank’s hand is hardly being forced at this particular moment.
  • The big whopping uncertainty: NAFTA renegotiation talks loom with the ultimate impact on the Canadian economy still a subject of debate.
  • Further uncertainty: The fate of the Toronto housing market. The sellers are out in force and the buyers are increasingly on the sidelines following government intervention. Longstanding housing bears at Capital Economics are predicting a housing correction that will ultimately force the BoC to cut rates in early 2018.