Which banks forecast a rate hike this week

After upside surprises last week in both exports and employment, as well as recent statements from the Bank of Canada, most of the big banks are forecasting a rate hike for Wednesday.

Read: Imports and exports hit record highs ahead of BoC decision

A sharp shift in tone from the Bank of Canada has markets “pricing in more than 90% odds of an interest rate hike in the July 12th policy meeting this week,” says Nathan Janzen, senior economist at RBC, in an economics report.

A rate hike is the right move, says Avery Shenfeld, chief economist at CIBC Capital Markets, in a weekly economics report, considering strong economic indicators like employment gains. At 6.5%, the unemployment rate is at its lowest level in more than eight years.

However: “The missing ingredient is inflation,” says TD Bank senior economist James Marple in a weekly economics report. The Bank of Canada’s three preferred inflation measures are averaging between 1.2% and 1.5%, while 2% is the target.

“The risk is that by raising rates in an environment of decelerating inflation, the Bank could tighten financial conditions in a way that makes achieving a return to 2% inflation more difficult,” he says. TD expects the Bank to leave rates as is until October, but “it is a very close call.”

Despite muted inflation, “if the economy doesn’t need rates this low to make solid progress, for financial stability reasons, we shouldn’t have rates this low,” says Shenfeld, referring to the potential for excess debt and further rate hikes to negatively impact households.

Janzen agrees. “There are clearly advantages to initiating an earlier and more gradual rate-hiking path in terms of allowing a more gradual adjustment in the highly leveraged household sector to higher rates,” he says.

BMO, CIBC, National Bank and Scotiabank are all forecasting a hike of 25 basis points for Wednesday (RBC provided analysis but not a forecast).

Looking ahead

Reacting to a potential hike, “10-year Canadian yields have backed up more than 30 bps in the past few weeks,” says Nick Exarhos, director at CIBC World Markets. He adds that yield-sensitive stocks, like those in the real estate sector, could face headwinds to further gains in the medium term.

Douglas Porter, chief economist at BMO Capital Markets, notes in a weekly report that the loonie is at its highest level in 10 months, but that rally “looks to have jumped the gun, especially given stalling oil prices and the fact that the BoC will be in zero rush to do any more than just reverse the two rate cuts of 2015 in the year ahead.”

Read: Why the TSX took a dive in early trading

CIBC and National Bank expect a second hike in Q4, putting the overnight rate back to 1%.

“Since the Fed will also be hiking in Q4, we should be done with the lift to the Canadian dollar from the change in Bank of Canada policy,” says Shenfeld. “In 2018, look for only a slow crawl higher from both central banks, with a hike every six months or so.”

Read: Don’t try to predict long-term rates

Scotiabank, too, expects another hike of 25 basis point in October and in Q1 of 2018, but because inflation is under its target, “we err on the side of a very limited amount of policy tightening followed by a prolonged assessment of the after-effects,” says vice-president and head of capital markets economics Derek Holt in a global outlook report.

Similarly, TD’s Marple says that, given the low inflation rate and uncertainty for future growth because of potential NAFTA negotiations and macroprudential housing measures in Ontario, “a pause [in rate hikes] to confirm that inflation is indeed moving in the right direction would not be out of the question.”

Read the full economics reports from RBC, CIBC, TD, BMO, National Bank and Scotiabank.