Banks’ predictions for the next BoC rate hike

This week, the Bank of Canada held fast to its 1% benchmark rate.

In a report, Desjardins economists describe the historically low rate as “reflective of highly expansionary monetary policy.” They thus expect normalization of rates in the coming quarters, albeit at a gradual pace.

“A third increase could be announced either in December or, more likely, in early 2018,” say François Dupuis and Benoit Durocher, Desjardins chief and senior economist, respectively.

More specifically, Douglas Porter, BMO chief economist, says in an economics update, “We have pushed back our call on when the [BoC] may now hike rates (to March from January) and the number of hikes next year (to three from four).”

That’s because of risks cited by the BoC in today’s monetary policy report, such as ongoing NAFTA negotiations and OSFI mortgage measures.

Read: OSFI to finalize stricter mortgage lending guidelines

“We have also trimmed our outlook on the Canadian dollar in 2018 (from an average of almost 82 cents to closer to 78 cents [U.S.]),” says Porter.

Read: What’s next for economy and loonie

Likewise, Nick Exarhos, director at CIBC World Markets, says in a note that he still expects the next rate hike won’t come until spring.

Further, “We continue to see the C$ weakening to 77 cents U.S. (USDCAD 1.30) by the early part of 2018,” he says.

Last week in a weekly economics report, TD economist Dina Ignjatovic said the BoC’s “forthcoming communication is key in assessing the future path for interest rates.”

Read: Monetary policy to be data dependent: BoC

Commenting that the output gap is closed and inflationary pressures are modest, Brian DePratto, senior economist at TD, says in a rate update, “There does not appear to be any immediate urgency to further increase interest rates, although this sweet spot also clearly implies that the current low level of rates will become increasingly unneeded.”

A December call?

Derek Holt, vice-president and head of Scotiabank capital markets economics, also refers to NAFTA and OSFI tightening measures, saying in a daily report, “Our last print forecast in early October was for a hike in December but with lessened confidence now, given material new developments.”

Holt hasn’t explicitly revised his rate forecast since today’s hike, but says in BoC commentary, “Market odds of a hike in December have dropped to about one in three post-statement, the C$ depreciated by a full cent, with USDCAD presently at about 1.2790, and the two-year GoC yield shed about 5 bps.”

In an economics update, RBC economist Josh Nye says, “Our current forecast is for the overnight rate to be raised to 2% by the end of next year.” That assumes a rate hike in December, he adds, although such a move is less likely given the bank’s dovish tone today.

“There is a risk that the Bank of Canada holds off on resuming tightening until early 2018,” he says.

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