The first interest-rate decision of the new year will be announced next Wednesday by the Bank of Canada, with an accompanying monetary policy report. While the central bank is largely expected to stand pat given soft economic data and declining oil prices, the content and tone of the announcement might provide clues to the potential tightening path ahead.
What to say—if anything—will be a tricky problem for the central bank, says CIBC chief economist Avery Shenfeld in a weekly report. For example, the central bank likely has a view on oil that differs from the static outlook it uses by design in the monetary policy report.
“If, as seems likely, the central bank expects a gradual return to firmer crude prices, it will likely expect that at some point it will nudge rates up,” says Shenfeld.
As such, he expects the Bank of Canada to express a sense of “we’ll get back to you later” when it comes to further tightening.
“That would open the door to a rate hike as early as April if oil prices have managed to rebound by then, and oil inventories in Alberta don’t look as bloated,” he says.
He adds that such a message, though vague, could put some upward pressure on short-term yields and the loonie’s value, because financial markets aren’t pricing in even one rate hike for 2019.
Household debt to rise in 2019
An RBC report notes that Canadian households have yet to feel the full brunt of the central bank’s interest-rate hiking cycle to date, and quantifies the potential effect: an average household will pay about $1,000 more in 2019 to service its principal and interest obligations.
“That would represent a 7.6% jump from 2018—a tough pill to swallow for many,” says the report. “Rising incomes, however, will provide a buffer.”
RBC expects average disposable income per household to rise by $2,300 in 2019, or $1,300 after servicing debt.
Still, the question remains whether that will be enough to cover rising prices.