Analysts Ponder More BOC Hikes Sooner Rather Than Later

By Yali N'Diaye

     OTTAWA (MNI) - Many analysts had expected the Bank of Canada to wait until

October to deliver a 25 basis point rate hike, but after the central bank

brought its key policy rate to 1.0% Wednesday from 0.75%, they are now pondering

further tightening sooner rather than later 

     The "insurance" that had been provided in 2015 in the form of a cumulative

50 basis point rate cut has now been entirely removed and the BOC showed

Wednesday the surprisingly strong run of the Canadian economy was more important

than any strategic communication consideration that could have led the central

bank to wait until the release of its next Monetary Policy Report and press

conference on October 25.

     "The risk of the Bank raising the policy rate again this year rose with the

Bank's decision to hike at the second consecutive meeting," said RBC Deputy

Chief Economist Dawn Desjardins.

     The BOC raised its overnight rate target by 25 basis points to 0.75% on

July 12 from 0.50%, where it had been since July 2015. With Wednesday's hike,

the rate returned to where it was prior to the oil price shock, with the BOC

citing "the stronger-than-expected economic performance," including strong

business confidence and exports.

     Real GDP grew at an annualized pace of 4.5% in the second quarter, far

outpacing the BOC's 3.0% projection. The central bank had penciled in a slowdown

to 2.0% in the third quarter, but acknowledged Wednesday the current higher

level of GDP than it had anticipated in July.

     Desjardins said she still expects Canadian GDP to slow to 2.5% in the third

quarter, which would nonetheless remain above potential, pushing "the economy

into excess demand after the output gap closed in Q2."

     "Against this backdrop, the Bank will want to gradually reduce policy

stimulus which they described today as 'considerable,'" Desjardins told MNI,

expecting the overnight rate target to reach 2% by the end of 2018.

     At PNC Financial Services Group, Senior International Economist Bill Adams

also sees the key policy rate reaching 2.0% by the end of 2018.

     Adams predicts the next hike in December, when the Federal Reserve is also

expected to deliver its next increase of the federal funds target range. 

     If not December, the BOC will tighten in January, Adams told MNI. 

     Citi economist Dana Peterson agreed the Fed policy will also play a role in

the BOC's decisions, as she is reassessing the BOC's interest rate path forward.

She wrote in a commentary that a BOC hike in October "is possible if the

favorable conditions that supported the last two hikes persist and downside

risks are not realized."

     Desjardins Senior Economist Jimmy Jean commented in a note that "by hiking

at successive meetings, and hiking in September without the least piece of

communication in six weeks, the BOC might have a hard time persuading the market

about any idea of gradualism, and even less on predictability."

     In fact, he told MNI he is now "leaning towards another hike in December,"

which would be followed by two more next year, bringing the key policy rate to

1.75% at the end of 2018.

     The BOC repeated Wednesday that future decisions will continue to depend on

data, but added it will also depend on financial market developments, stressing

there is no "predetermined" path to the removal of the current "considerable"

monetary stimulus.

     Still, "if the economic outlook proceeds as the Bank expects (although no

specific forecast was given and is not expected until the October MPR), a rate

hike is most likely in December 2017 or January 2018," IHS Markit economist

Arlene Kish wrote in a commentary, adding the timing will also depend on the

global growth picture.

     But for Capital Economics, Wednesday's statement could mean another hike

coming as soon as next month, which would be the last of the year.

     "As before, we have our doubts about the economy, particularly because of

significant housing imbalances," Senior Canada Economist David Madani told MNI,

expecting a slowdown going forward, "perhaps even badly."

     "So, on that basis, interest rates peak at no more than 1.25% this year,

before being cut next year," he said, assuming a further 25 basis point hike by

the end of 2018. 

     At TD and CIBC, economists are also pondering a more hawkish scenario.

     "Clearly we see risks to our call for a third hike pulled forward from

April 2018 to no later than January 2018, possibly October or December despite

the Bank's citing of slack in the labor market," said TD analysts in a

commentary.

     CIBC analyst Andrew Grantham pointed out in a commentary that the BOC

statement gave "fewer hints" of a prolonged pause.

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

[TOPICS: M$C$$$]