Rate hike certain, economists say

By Steven Lamb | July 6, 2007 | Last updated on July 6, 2007
2 min read

An interest rate hike is all but certain when the Bank of Canada convenes on Tuesday, following a StatsCan report that showed strong job growth in June. The month saw a net gain of 34,800 jobs, with 62,600 new full-time positions offsetting losses in the part-time labour market.

There had been some hope among market-watchers that April’s surprisingly flat GDP report would give the BoC reason for pause, but with job growth surging, a 25 basis point hike is now widely accepted.

“This one is clear-cut: The labour market remains drum tight, as vividly displayed by the continued low jobless rate and now some bubbling upward pressure on wages,” wrote Douglas Porter, deputy chief economist at BMO Nesbitt Burns. “Against this backdrop, the Bank of Canada appears fully primed to hike rates next week and is likely to follow with another move in September, despite the ongoing and deepening woes in manufacturing.”

A 25 bp rate hike would be the first since May 2006, and would take the overnight rate to 4.50%.

The BMO economic team is not alone in its conviction. Warren Lovely, senior economist at CIBC World Markets, says that despite the loss of over 300,000 manufacturing jobs in the past five years, the economy has held up remarkably well, and the Bank of Canada’s next move is a sure thing.

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  • “Rates are going up by 25 basis points next Tuesday,” Lovely affirms. “That move was already priced into the market, and the accompanying hawkish statement and residual upside risks to core inflation will only bolster expectations of follow-on tightening in September.”

    The service sector has largely picked up the slack created by cuts in manufacturing, while wages for the average permanent worker were 3.2% higher in June, on a year-over-year basis.

    “The rationale behind the Bank’s likely decision to hike next week is fairly clear cut,” writes Marc Lévesque, chief economics strategist, TD Securities. “For one, core inflation has been running systematically above the Bank of Canada’s target, and instead of cooling down, inflation pressures appear to be heating up. Second, this is not occurring against a favourable backdrop — the economy is operating through its capacity limits.”

    He also points out that first quarter GDP growth “blew away” the Bank’s estimates, growing by an annualized rate of 3.7%, so the flat follow-up in April did little to mitigate the inflationary picture. Even with a bad start to Q2, the BoC is predicting growth of 2.3% for the three months ending June 30.

    Lévesque isn’t just predicting the rate hike; he’s advocating it. “We would argue that the Bank will be making a mistake if it does not tighten its policy settings,” he says.

    Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com


    Steven Lamb