Additional rate hike in the offing?

Additional rate hike in the offing?

Additional rate hike in the offing? Homebuyers and, indeed, brokers should prepare for more rate increases this year, according to TD Bank.

“Governor Poloz suggested that the Bank's thinking regarding the path forward cannot be slotted into the categories of either removing the 2015 stimulus, or striving to normalize interest rates,” Brian DePratto, Senior Economist at TD Bank, wrote in his analysis of the rate decision. “As such, we believe that another rate hike is likely at the Bank of Canada's October monetary policy decision, but a slightly slower pace of one 25bp hike every six months or so is likely thereafter.”

The Central Bank raised its new target for the overnight rate to ¾% Wednesday, citing a confident financial outlook and above-potential growth.

This despite softened inflation, which the bank judges to be temporary.

“Governing Council judges that the current outlook warrants today’s withdrawal of some of the monetary policy stimulus in the economy,” the Bank said. “Future adjustments to the target for the overnight rate will be guided by incoming data as they inform the Bank’s inflation outlook, keeping in mind continued uncertainty and financial system vulnerabilities.”

The BoC estimates real GDP growth to moderate from 2.8% in 2017 to 2% in 2018 and 1.6% in 2019.

The 25 basis point increase was unsurprising, as the Central Bank had expressed optimism about the economy leading up to the decision.

“A sudden and dramatic change in the tone of the Bank's communications early last month had markets expecting a rate hike, and the Bank delivered today,” DePratto wrote. “While the Bank rightly sees a stronger near-term growth outlook, it also sees a meaningful turn-around in inflation over the coming quarters. The statement pointed to temporary factors that are seen as holding back inflation, as recent statements suggesting that the current softness in price growth was a reflection of past economic setbacks were downplayed somewhat.

“This explanation is somewhat curious given the weakness in the Bank's 3 measures of 'core' inflation, which should by definition remove the impact of temporary and/or idiosyncratic influences.”
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