Further increases in interest rates are still coming

Further increases in interest rates are still coming

Further increases in interest rates are still coming

Although current interest rate levels remain reasonable, further Bank of Canada rate increases are still definitely in the pipeline, according to observers.

“[BoC governor] Poloz stated that the current level of rates were appropriate for the time being, a possible hint that the bar is high for a move in January,” CIBC economist Royce Mendes wrote in a client note, as quoted by Bloomberg.

“The move in markets [on December 5] was clear, and Governor Poloz didn’t do anything to walk back investors’ dovish interpretation today.”

Since the middle of last year, the central bank has already hiked interest rates 5 times.

The BoC’s tone, which was seen as relatively meek, lowered investors’ expectations of more increases. The market-implied probability of a hike in January fell below 50%, with only one increase predicted to take place over the next 12 months.

Read more: Prospects of a January hike dimmer with BoC’s ‘dovish’ stance

Poloz himself acknowledged that the bank will eventually need to bring rates back into a “neutral range … somewhere in the neighborhood of 2.5% to 3.5%.”

The governor explained that realities such as low unemployment, near-target inflation levels, and an economy that is operating close to capacity will figure into any decision, although such a move will of course “remain decidedly data dependent.”

“This is the point of the business cycle where inflation pressures can start to build, so it is natural that we are looking to move interest rates to a neutral level.”

 

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