Interest Rates Will Likely Hold Put, but Bank of Canada Has Reason to Consider Hike

With the central bank expected to play a passive role for the time being, there’s a 90 per cent chance interest rates stay put for September when the Bank of Canada comes to a consensus on monetary policy come Wednesday.

However, there’s an 80 per cent chance of a rate hike next month. Come October, many believe the central bank should cease holding put, even after last week’s second quarter GDP blunder and increasing rates for the fourth time in a year during July.

Neglecting to Raise Interest Rates Considered Unwise by Many

In the eyes of Derek Holt, head of capital market economics at Scotiabank, there is ample justification for an immediate hike, and that the risk of surprise is more than what is being displayed on the market.

Holt noted that the 2.9 per cent increase throughout the second quarter may have been a touch short of market consensus of 3.1 per cent, but still more than the 2.8 per cent projected by central bank. He believes the ability to hike in October or December may be hindered by growth moderation. Therefore, taking action now may be more beneficial than sitting and waiting to make a decision.

What Will Central Bank Do in Face of NAFTA Uncertainty?

It’s believed by many that leaving interest rates alone is unsound, even in the face of NAFTA panic. At the very best, NAFTA will still be an issue deep into 2019, as a multitude of legislative hurdles will slow the process even when negotiations end. For NAFTA to put a halt on monetary policy in attempts to navigate negotiations could be construed as short-sighted.

Stephen Poloz, the Bank of Canada governor has been clear that NAFTA will only be considered as much as it impacts economic data and has held firm that the central bank adheres to said data.

The Bank to Display Debt Patience

Economists claim that while data is conveying higher interest rates as feasible, the central bank is focusing on how high debt households are managing their finances when challenged by rising rates.

The new mortgage regulations put in place have slowed the housing market from its previous fervent growth and in turn lessened debt burdens, but the central bank understands that it will still take time to pay off large debts and lessen debt ratios. Unless there’s a massive spike in sustainable income growth, the bank will be understanding when dealing with larger debt burdens.

In light of new lending rules compounded with escalating interest rates, mortgage borrowing plummeted to its lowest since 2014 during the first quarter of this year.

Still a Need to Be Up Front About Risks

Considering that negotiations between Canada and U.S. are on the same day as the interest rate decision, there’s plenty of reason to be transparent about downside risks when the central bank releases its statement.

The Bank of Canada will be announcing their policy decision at 10 a.m. on Wednesday.