Canadians should anticipate for another interest rate hike: Whether by this week or next month

Canadians should anticipate another interest rate hike: This week’s meeting of the Bank of Canada is surrounded by considerable suspense. Whether the Fed decides to raise rates on Wednesday or wait until July, economists and the market are increasingly anticipating an increase.

In order to assess the impact on the economy, the Bank of Canada paused its rate-hiking cycle early this year, after raising rates from near zero to 4.5%.

In an effort to reduce inflation, rate hikes are intended to function as a brake on the economy, but so far our economy has shown surprising resilience.

Annualised growth of gross domestic product in the first quarter exceeded the Bank of Canada’s forecast of 2.3%. A preliminary estimate of a 0.2% month-over-month increase in April suggests that growth may also exceed the Bank’s expectations for this quarter.

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An interest rate increase by this week or next month

Inflation numbers for April also surprised economists, rising to 4.4% from a year ago instead of the expected 4.1%, marking the first increase since June 2022.

And the housing market in Canada is heating up again, with the average home price increasing 4.3% in April and nearly 17% since January.

According to Capital Economics, rising home prices are especially problematic because research from the Bank of Canada indicates that consumers’ inflation expectations are significantly influenced by the housing market.

The query is how many and when additional rate increases will be implemented.

A number of economists believe that the Bank will hold its fire this week and then possibly raise rates in July, including the market, where expectations for a rate hike on June 7 were only 38% last week.

The chief economist of Desjardins, Jimmy Jean, asserts that banking turmoil in the United States has tightened credit across North America and that this alone could have an effect equivalent to another rate increase, or even more.

If the Bank of Canada unexpectedly raises interest rates this week, it could spur speculation of additional hikes, tightening financial conditions to a point where the Bank may not be comfortable, he said.

Even though the U.S. debt ceiling dispute has been resolved, the issuance of Treasury bills and notes by a cash-strapped U.S. Treasury may have an effect on Canadian funding markets.

“As a result, what we anticipate for [Wednesday] is the Bank of Canada revving the hike engine but not yet shifting into gear,” Jean wrote in a note.

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Canadians should anticipate another interest Rate hike

Avery Shenfeld, chief economist at CIBC, writes, “The Bank of Canada is in the awkward position of having to make a rate announcement [Wednesday] and then receive the May employment report on Friday.”

“By using the June announcement to issue a stern warning that a rate hike in July is a distinct possibility, they can keep bond yields and mortgage rates elevated while delaying a decision until they have the data,” he said in a note released on Friday.

Shenfeld predicted that May’s employment numbers will be elevated due to Statistics Canada’s inclusion of past population growth. Friday’s most important number will be the unemployment rate.

“If it does not begin to rise, the wheels will be in motion for a rate hike in July,” he said.

Stephen Brown, deputy chief North America economist at Capital Economics, asserts that the market is underestimating the extent to which the Bank will raise interest rates and predicts a rate increase this Wednesday and possibly another in July.

“If the Bank raises rates by 25 basis points on Wednesday, to 4.75 percent, and issues a hawkish statement, we assume the Bank will raise rates by another 25 basis points in July,” he wrote. “However, we’ll wait for the meeting… before making that call official.”

Wednesday’s lack of a press conference provides a further justification for the Bank’s potential inaction. “One would assume that a resumption of tightening would warrant having the BoC’s top dog(s) deliver the news, smoothing over any interpretational issues, should they arise,” economists from the National Bank wrote Friday.

However, the central bank of Canada has not veered away from surprises in the past.

“Investors beware, this is very much a ‘live’ meeting,” they cautioned.

Canadian Mortgage Rates Update: Lowest fixed and Variable Mortgage for June 2023