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BMO: Another Close Call But Tilting To A Hike This Week Before Pausing

CANADA
  • BMO view tomorrow's BoC policy announcement as yet another close call. The decision to hike 25bps or hold could go either way, with the market pricing around a 70% chance of a 25bp hike.
  • There are reasonable arguments on both sides, but the solid June employment report likely tilts the scales toward another hike.
  • A further 25bp increase would leave the policy rate at 5%, the highest since 2001. Barring another burst of strength in the economic data, the BoC will likely pause for an extended period thereafter. However, the risks remain skewed to further hikes through at least the rest of this year.
  • The 2023 GDP growth forecast will likely get an upgrade after the Q1 beat. In addition, Q2 GDP could get a modest bump higher from the 1% estimate in April. The Q3 forecast will be introduced, and expect something in the 0%-to-1% range.
  • We’ll be watching to see if the upgraded growth history/near-term forecast impacts the timing of the closing of the output gap and, in turn, when inflation returns to the 2% target. Recall that the April MPR forecast had inflation returning to target at the end of 2024.
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