Analysts: BOC Rate Hike More Likely in October Than September

By Courtney Tower

     OTTAWA (MNI) - The Bank of Canada will surely hike the policy interest rate

to 1.0% this fall, analysts said, adding the question is not so much whether as

it is when. 

     "It's just a question now of tactics," Avery Shenfeld, chief economist at

CIBC, told MNI: "Do you want to raise the rate at two successive rate-setting

dates, which might send the wrong message to markets, that you are hiking in a

hurry?"

     "Or is it better to skip one rate date and come back with a hike in

October, to underscore that there is a gradual process?," Shenfeld said.

     CIBC believes that the BOC will skip a hike on September 6 but that its

accompanying statement "will send the appropriate message that rate hikes will

unfold only gradually."

     So does Desjardins Senior Economist Jimmy Jean, who expects the central

bank to hike rates only when the Monetary Policy Report is published, "at the

very least in these initial stages of the normalization." 

     The BOC increased the overnight rate target to 0.75% last July from 0.50%,

where it had been since July 2015. It will provide its next economic assessment

on October 25.  

     On the growth front, analysts expect a strong second quarter GDP.

     On pretty well every count of the major elements of GDP, Canada's growth in

the first half has been remarkable. To consider employment, manufacturing jobs

have rebounded from record lows, in areas led by food processing, chemicals,

machinery, autos and parts, "all benefitting from an upturn in exports," Sal

Guatieri, senior economist at BMO Capital Markets, wrote recently.

     Overall, considering both private and public employments, and the goods and

services sectors, "Canada is also near full employment," he wrote. He thus

expects growth to moderate to 1.3% in 2018 as real GDP growth subsides and

worker shortages develop.

     Bank of Canada Governor Stephen Poloz was careful to say in July that

central bank policy would be "highly data-dependent as we move forward." That

data has improved and overall further improvement is expected. But the BOC was

just as careful to add that it also would keep in mind continued uncertainty

coming from possible United States policies, the global outlook, and their

effects on the world financial system. That latter has not changed, bespeaking

continued carefulness.

     The BOC's July expectation of 2.8% real GDP growth for Canada in 2017 is on

track to be exceeded and the BOC expects the 2% inflation target to be reached

in the middle of 2018.

     The second quarter GDP numbers to be released later Thursday should show a

near 4.0% annualized growth pace, according to Douglas Porter, chief economist

at BMO. Such figures "are a very abrupt turn-around from a year ago, and the

data is the strongest reason for looking for another rate hike this year."

     Porter expects the hike not on September 6 but on October 25, "because the

BOC can still take its time, inflation is still quite modest, and general

outlook is for moderation ahead but still positive growth."

     Pedro Antunes, head of economic analysis and outlook for the Conference

Board of Canada, told MNI that the Board sees consumer spending and real estate

spending moderating but that private capital investment and non-resource exports

are starting to come up.

     "It still is very tentative," he said. "But we do see capital investments

and exports improving a bit, finally, on the non-resource side, as the Bank of

Canada has been projecting and desiring for a very long time."

     Like most others, Antunes sees a hike to 1.0% by the end of this year, then

a pause, then second half of 2018 hikes to 1.5%.

     At 1.50%, that would remain a historically low Bank of Canada policy rate,

and thus mortgage and other private interest rates - still very low and still

very stimulative to the Canadian economy, he said.

     At Capital Economics, economist David Madani told MNI he sees the BOC

hiking either in September or in October. A new hike "is ill-timed, should have

happened long ago and not after the horse has bolted," he said.

     Unlike many analysts, Madani thinks the present and future hikes will not

last.

     While official authorities and many analysts see the heated housing

environments in Greater Toronto and Greater Vancouver now tapering off, resales

cooling rapidly, and a so-called soft landing emerging, Madani differs.

     He wrote in a commentary that "Early next year, we expect fears of a major

housing correction to begin to weigh much more heavily on economic growth,

eventually prompting the Bank to cut interest rates."

     Speaking to MNI, Madani emphasized that this major correction would force

the BOC to abort its rate-hiking cycle and reverse itself.

     He expected in housing "a major correction, one deeper than Canada has seen

before."

     Given housing and its many related aspects in the economy, Madani said he

foresaw serious, though perhaps not recessionary, effects on the Canadian

economy.

     The Bank of Canada's view in its July MPR was that "residential investment

is expected to contribute less to overall growth." This and regulatory moves by

governments and higher long-term borrowing costs all would "weigh on housing

expenditures." The Bank went no further. It did not estimate how heavily this

spending might decrease or with what effects.

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

[TOPICS: M$C$$$]