OTTAWA (Reuters) - The Bank of Canada is widely expected to raise interest rates on Wednesday for the first time in nearly seven years, following the Federal Reserve in a bid to inch rates back toward normal after the global financial crisis a decade ago.
The move, considered unlikely as recently as six weeks ago, would make Canada the first major central bank to follow the U.S. central bank in removing the monetary stimulus poured into the global economy in the wake of the 2008 credit crisis.
The bid by Bank of Canada Governor Stephen Poloz to move rates from near-historic lows of 0.50 percent is hotly debated, with the nation facing stronger economic growth but also a cooling housing market, little inflation, and uncertainty about its trade with an increasingly protectionist United States.
“Initiating a hiking cycle when core inflation is running at 1.3 percent ... would probably grant Governor Poloz the title of being the most hawkish Bank of Canada governor during the inflation targeting regime,” economists at TD Securities wrote in a research note.
Market-watchers have scrambled in recent days to keep up with the increasingly hawkish tone from Poloz, who has signaled a desire to reverse two rate cuts made in 2015 to counter low oil prices.
The likely hike comes as central banks are looking to lift rates to give themselves ammunition to fight the next downturn, said Brett Ryan, senior U.S. economist at Deutsche Bank, who expects the bank to wait until October to hike.
“The bottom line is we’re moving away from crisis-type levels of monetary policy because it’s no longer warranted,” Ryan said. “It doesn’t mean we’re going to yank the punch bowl away, it’s just it’s time to start taking our foot off the accelerator.”
The Fed has hiked rates three times in the last eight months and four times since 2015. While other central banks are not yet tightening, Bank of England Governor Mark Carney said in late June a rate hike was probably necessary and the bank would debate it in the coming months.
Analysts said following the Fed provides a degree of safety.
“Absolutely we are insulated, since the huge neighbor to the south has already done so,” said James Laird, president of CanWise Financial. “It doesn’t change the spread tomorrow - they (the Fed) are still significantly higher and they still moved before we did.”
A rate increase would be the first by Poloz, who took over at the helm of the bank in 2013 after his predecessor Carney went to the Bank of England.
The Bank of Canada cut rates eight times under Carney during the financial crisis before hiking three times in 2010 in an aborted attempt to wean the economy off cheap money before the oil crisis forced a return to easing.
Reporting by Andrea Hopkins; Editing by James Dalgleish
Our Standards: The Thomson Reuters Trust Principles.