July 7, 2017 / 1:30 PM / 2 years ago

Forecasters divided on whether Bank of Canada hikes rates next week: Reuters poll

(Reuters) - Higher interest rates are coming to Canada sooner than had been anticipated, a Reuters poll showed, but economists are divided on whether the central bank will act next week as it weighs supporting the economy against preventing the housing market from overheating.

A sign is pictured outside the Bank of Canada building in Ottawa, Ontario, Canada, May 23, 2017. REUTERS/Chris Wattie

After years of ultra-low rates and just months after saying cuts were still on the table, the central bank has said in recent weeks that the pair of 2015 reductions had done their job in cushioning the economy from plummeting prices for oil, a major export.

That prompted economists to bring forward rate hike expectations. Fourteen of 31 economists, including all but three from the 11 banks that do business directly with the Bank of Canada, expect it to raise rates by a quarter percentage-point to 0.75 percent on Wednesday.

Still, the median consensus in the poll showed the hike would not come until the fourth quarter, but that is still sooner than the second quarter of 2018 in a May poll.

Canada’s growth is broad-based, and business sentiment is picking up, which supports the central bank’s recent hawkish stance, said RBC Capital Markets economist Josh Nye, who now expects a rate hike next week rather than in the second quarter of 2018.

The swift forecast revisions came as economists were still smarting from not anticipating the Bank of Canada’s rate cut in January 2015.

Canadian gross domestic product accelerated at a solid 3.7 percent annualized pace in the first quarter, and there are signs that momentum carried over into the second.

The poll showed the economy would grow 2.6 percent this year, compared with 2.1 percent forecast in May, while respondents kept their 2018 forecast at 2.0 percent.

Inflation, on the contrary, has held well below the central bank’s 2 percent goal for more than five years and is not expected to reach that target until 2019.

Still, low inflation does not necessarily mean the bank will not raise rates, some economists said.

“You can have gradual interest rate hikes to control inflation down the road,” Nye said. “It doesn’t conflict with not wanting to stimulate household spending too much and increase household debt.”


Supported by cheap loans, Canadian household debt has more than doubled since the housing boom started in 2009, with mortgages accounting for about 66 percent of that. The average Canadian owes C$1.67 ($1.29) for every dollar of disposable income, chasing ever-rising home prices.

Answering an extra question in the poll, respondents said if the central bank were to wait too long before raising rates, home prices and household debt could rise further, posing a near-term risk to the economy.

Federal and provincial governments have taken various steps to cool Canada’s hot housing market, but economists said those efforts were unlikely to keep a lid on prices for long.

“Those (steps) might be temporary,” Nye said, “and to me that does argue for some gradual tightening in monetary policy to make sure that cooling in the housing market or improvement in household imbalances is more lasting.”

However, a premature rate hike could backfire and push housing prices lower if the economy also takes a severe hit from U.S. trade policy, economists said. Canada sends more than 75 percent of its exports south of the border.

After the price of oil collapsed, Bank of Canada Governor Stephen Poloz shifted the focus to other exports, hoping a weaker currency and stronger U.S. demand would lead to a rebound.

But U.S. President Donald Trump has vowed to renegotiate the North American Free Trade Agreement to his country’s advantage and, according to a recent Reuters poll, changes to the deal could go beyond minor “tweaking.”

The United States has already imposed duties on Canadian softwood lumber, while Trump has accused Canada’s dairy industry of protectionism.

Meanwhile, oil has slumped 16 percent so far this year, and analysts have cut price forecasts for 2017 and 2018 on the prospects of a continued rise in U.S. production.

But what could bring some respite is the Canadian dollar, which is expected to weaken over the coming year.

Polling by Anu Bararia; Editing by Lisa Von Ahn

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