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Bank of Canada’s Next Rate Move

The Bank of Canada has already hiked the overnight rate twice this year, and many experts suggest even higher interest rates are on the way — but not everyone agrees when Canada’s central bank will make its next move.

BMO Senior Economist Robert Kavcic says another Bank of Canada move to increase the overnight rate, which influences mortgage rates, is “possible” this year but not the likeliest of outcomes.

“We’re kind of working on the assumption that they’re done until probably January,” Kavcic tells BuzzBuzzNews, predicting “a few more rate hikes in 2018.”

These would follow Bank of Canada hikes of 25 basis points in July and September that resulted in the overnight rate reaching 1 per cent, up from a historically low 0.5 per cent, where it has stood since 2015.

The Bank of Canada’s more aggressive monetary policy of late comes after seven years without a single hike. Kavcic suggests it is a result of “the economy getting back to potential.”

The hikes may pose problems for Toronto’s housing market, the BMO economist notes. Higher rates could extend and deepen Toronto’s home price correction, he adds, but says most markets across the country have been “very well behaved” and can handle an environment of higher rates.

Like BMO’s Kavcic, David Madani, senior economist for Canada at Capital Economics, doesn’t ignore the possibility of an October rate hike. But he offers another possibility as well — a scenario in which rates drop again.

“Given the potential for a disorderly unwinding of housing-related imbalances, we still think that this rate hike cycle is a gamble that might have to be reversed before long,” Madani adds in a recent report.

National Bank, Canada’s sixth largest bank, says the stage has been set for a rate hike in December.

“The bank wouldn’t want to be behind the curve,” Marc Pinsonneault, a National Bank senior economist, tells BuzzBuzzNews, outlining what spurred the first two hikes: the record-level rate of employment among prime-aged workers and the closing of the economy’s output gap.

The output gap compares potential economic output with its actual performance.

Pinsonneault says a home price correction in Toronto “won’t affect what the Bank of Canada does.”


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