Bank of Canada to lift rates three times in 2019, but cautiously
The Bank of Canada will next raise interest rates early next year, and twice again by the end of 2019, according to economists polled by Reuters who say the central bank needs to be careful with the pace of tightening.
As recently as late October there was a minority view that a rate rise might come in December. But a huge plunge in the price of oil – Canada's main export – along with evidence of household budget strain has largely erased those expectations.
The unanimous call for no hike in December is in line with interest rate futures pricing, which suggests a greater than 90 percent probability of no move when BoC Governor Stephen Poloz and colleagues meet this week to set policy. A decision is expected on Wednesday.
About 56 percent of 23 common respondents in the latest Reuters poll taken Nov. 29 to Dec. 3 show expectations for at least three rate rises in 2019, slightly down from 60 percent in the last poll taken in late October.
Meanwhile, Canada's economy expanded at a slower pace last quarter due to a decline in auto vehicle purchases and housing investment, posing another challenge to the central bank.
"A fly on the wall in the Governing Council's meeting room would hear whether the recent news has shaken the confident hawkishness the Bank projected in October," noted Avery Shenfeld, chief economist at CIBC.
"In any event, the Bank's next forecast is due in January, when our projection has them returning with a quarter-point hike. We'll need to see both firmer GDP results for October and at least some signs of a turn in crude oil for that call to play out," added Shenfeld, who only expects one more rate rise.
Core inflation is around where the BoC wants it to be, but wage pressure has eased slightly. That, along with signs of slowing in the world economy, gives the central bank reason to wait at least until January before lifting rates to 2.0 percent.
Indeed, like the expected rate path for the U.S. Federal Reserve, the risk is for fewer rate rises next year, not more.
"The coming week will place a heavy degree of market emphasis upon how the Bank of Canada is reading the shifting tea leaves," noted Derek Holt, head of capital markets economics at Scotiabank, who expects four rate rises next year, leaving them at 3.0 percent in mid-2020.
"That's because up to this point, the BoC has been inclined to guide expectations toward a gradual path of rate hikes toward a more neutral policy rate."
One poll respondent, Stephen Brown at Capital Economics, expects the central bank to hike rates one more time and then cut them starting late in the year, taking rates to 1.50 percent in the first quarter of 2020, below where they are now.
With many households geared up on big mortgages taken out to purchase expensive homes that until recently were rising in double digit percentages annually, particularly in Toronto and Vancouver, the BoC needs to be cautious.
Those property hotspots are likely to be subdued in coming months, along with expectations for lackluster housebuilding and sales, according to a recent Reuters poll of property market analysts.
(Writing by Ross Finley Reporting and polling by Mumal Rathore and Indradip Ghosh Editing by Susan Thomas and Alistair Bell)