Rates to rise starting next week: big five banks

The Bank of Canada’s next interest rate announcement is Jan. 17, and all big five banks expect a rate hike after last week’s stellar jobs report.

Read: Equity returns, rate hikes and risks: experts weigh in

“For a data-dependent Bank of Canada, across-the-board labour market strength likely seals the deal on a January rate hike,” says TD economist Rishi Sondhi in a weekly economics report.

Jobs added in December hit a robust 79K, despite expectations for a slowdown following a similarly massive gain in November (80K). Further, the unemployment rate fell to a multi-decade low (5.7%), hours worked surged and wage growth held near 3%.

“Notably, employment in the finance, insurance and real estate sector was up a robust 4.6% year-over-year in December, providing some comfort ahead of the implementation of the B20 [new mortgage] guidelines,” says Sondhi.

In a report, Derek Holt, vice-president and head of capital markets economics at Scotiabank, says he expects a hike of 25 basis points on Jan. 17.

“The odds of a hike are not 100% given ongoing uncertainties (NAFTA, B20, etc.), but in our judgment they are high enough to make the change to our forecast, which previously anticipated a hike in April,” he says.

Douglas Porter, BMO chief economist, is also on board with a January hike. In a weekly economics report, he says that, after the jobs data were published, odds for a rate hike leapt to more than a two-thirds chance, from one-third.

Further, Porter says three rate hikes for the year are priced in. But that forecast could change after he assesses the business outlook survey, which the central bank publishes today.

“While we would not quibble with the January odds, we would fade a more aggressive outlook for the Bank through the rest of 2018 (sticking with three hikes this year), at least until we have a better sense of where the NAFTA talks are headed.” The next round of talks will be held in Montreal from Jan. 23 to 28.

Likewise, for future hikes, CIBC chief economist Avery Shenfeld says he’ll be looking at today’s business outlook survey. In a weekly economics report, he says, “Watch for colour commentary on what companies are assuming on NAFTA and its risks to capital spending plans—an issue that could see the Bank of Canada pause for longer than the market expects after a January hike.”

(The business outlook survey revealed no qualms about NAFTA.)

RBC’s outlook is more hawkish, at four hikes in 2018.

In a monthly financial markets report, RBC economist Josh Nye says that, with wages and inflation picking up, the BoC will likely be increasingly concerned about falling behind the curve in tightening monetary policy.

“We now look for a move in January and once-a-quarter hikes through the rest of the year, leaving the overnight rate at 2% by the end of 2018 rather than the 1.75% rate we previously expected.”

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

Also read:

5 economic trends to watch in 2018