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Jun 26, 2018

Odds of July rate hike rise as Bank of Canada decision looms

Rate hike odds rise after Bank of Canada speech

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Investors are raising bets the Bank of Canada will move ahead with an interest rate hike next month, after Governor Stephen Poloz reiterated his outlook for higher borrowing costs.

Odds of a hike at the July 11 rate decision jumped to more than 70 per cent Thursday, from just over 50 per cent a day earlier, after Poloz told reporters he expects to continue raising interest rates in spite of mounting trade tensions because inflation has already hit the central bank’s two-per-cent target. The Canadian dollar gained 0.7 percent to $1.3256 per U.S. dollar at 10:47 a.m. ET.

“We’ve said clearly that, given where the economy is, we’re in a situation where the economy will warrant higher interest rates,” Poloz told reporters after a speech in Victoria, British Columbia. “We’ll ensure that that is a gradual process because there are certain issues that we must monitor along the way, and we’ve laid those out.”

Poloz said the economic “big picture” supports a withdrawal of stimulus given interest rates remain at historically low levels. The central bank also isn’t likely to be derailed by “single-data points,” referring to a string of disappointing economic numbers in recent weeks, or heightened trade uncertainty whose actual impact remains unknown.

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The speech and press conference were Poloz’s last scheduled public appearances before his July 11 policy decision. Investors had been paring back expectations in recent weeks for a hike next month as trade tensions escalated globally and weak economic data cast some doubt about the underlying strength of the economy.

While Poloz’s speech Wednesday focused on why the central bank should avoid over-communicating policy intentions, he was definitive at the press conference about the overall direction of the rate path. The Bank of Canada has already raised interest rates three times since last July, bringing its benchmark rate to 1.25 percent.

“The way we think of this is that the economy is operating very close to its capacity and inflation’s on target, so we’re more or less what I’ve described as ‘home’ in other speeches,” Poloz said. “And the thing that looks odd in that picture is that interest rates are still very low by historical standards.”

Canada’s central bank governor declined to say which way policy makers may be leaning for next month’s decision, but seemed to downplay some recent weakness in economic data, while choosing to emphasis first-quarter gross domestic product numbers that came in exactly as the central bank had predicted. Poloz also said business investment remains “reasonably robust,” giving policy makers optimism.

'MORE CONVICTION'

“On balance, I have more conviction that the BoC will hike on July 11th following Poloz’s communications than beforehand,” Derek Holt, an economist at Scotiabank, said in a note to investors Wednesday.

As far as trade uncertainty is concerned, Poloz said the central bank is focused on the data, not speculation on political developments, and the central bank will incorporate actual developments like U.S. steel tariffs and Canada’s retaliatory measures in its decision-making process ahead of next month’s decision.

“We’re data dependent, not headline dependent,” Poloz said. “We’re not going to make policy on the basis of political rhetoric or any of that.”

With assistance from Erik Hertzberg and Josh Wingrove.

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