There’s a chance of a rate hike this week, but July is more likely: economists

The odds of the Bank of Canada hiking rates at this week’s monetary policy meeting vs. another hold are basically down to a coin toss, economists say.

However, markets see a slightly greater chance of the Bank of Canada opting to stay on the sidelines for one more month to wait and receive the May employment statistics, which will be released on Friday.

That may or may not then increase the likelihood of a 25-basis-point rate hike (0.25%) at the Bank’s July 12 meeting.

“The Bank of Canada’s June 7 policy announcement is a close call, with the decision between staying on hold and hiking rates another 25 bps on a knife edge,” noted BMO’s Benjamin Reitzes.

Economists from Desjardins similarly noted that whether or not the Bank will hike rates this week is “almost a coin flip at this point.”

Overnight Index Swap markets are currently pricing in a 41% chance of a rate hike this week, but odds rise to 78% for the Bank’s July meeting.

Increasingly evident rates aren’t high enough

At a recent panel discussion hosted by the Empire Club of Canada, BMO Chief Economist Doug Porter said rising house prices are another indicator the Bank is surely watching with interest.

“If the most interest-sensitive cyclical component of the economy—housing—is able to withstand the rate increases of the past year and is actually starting to come back, the question has to be, ‘have rates gone nearly high enough?’” Porter said. “And I think the answer is self-evident—no. And I think the concern is that both the Bank of Canada and the Federal Reserve may go back to the wells and raise interest rates again.”

Of economists from the Big 6 banks, only Scotia Economics is forecasting a rate hike on Wednesday, which it expects would be accompanied by “continued guidance that leaves the door open to further tightening.”

“We think the BoC needs to weigh potential upside risks to the inflation outlook more heavily than has been warranted since the pause was announced,” the economists wrote. “This suggests to us that a more cautious approach to inflation management is required, and that an additional 25 basis points move is required” at this week’s meeting.

“The BoC no longer has the luxury to wait to see whether or not [upside] risks materialize given the outsized costs of a further deviation from target,” they added. “The question for Governor Macklem and his colleagues is not whether or not they will raise their inflation forecasts, but rather by how much they will do so.”

On the rate decision:

• Desjardins: “While we wouldn’t rule [out a June rate hike] as a possibility, we view a move in July as more likely…market expectations still lean towards maintaining the status quo for the upcoming meeting. Surprising the market with a rate hike could lead to speculation about follow-up moves and tighten financial conditions to a degree that the BoC may not be comfortable with just yet.”
• National Bank: “We see an argument for holding off for at least one more month, giving policymakers a bit more time to collect data and assess the economic/inflation impulse to earlier rate increases. The ability to take the patient approach stems from the fact that their overnight target is already well above their own estimated neutral range (2-3%). Nonetheless, this is very much a ‘live’ meeting, and the Bank would just as easily be able to justify a rate hike given how they’ve structured their guidance.”

On GDP:

• BMO: “The latest read on the economy saw Q1 GDP grow 3.1% annualized, with momentum picking up entering Q2. The flash estimate for April GDP was +0.2%, seemingly overcoming the drag from a two-week public sector strike, suggesting that the economy has even more underlying momentum than expected. The Bank of Canada is projecting (hoping?) that a period of below-potential growth will tame inflation over the next few quarters, with the 2% target achieved by the end of 2024.”

On employment:

• National Bank: “Even though the labour market is generating more jobs than at any time since the beginning of the year and the fight against inflation is stagnating, this does not mean that the Bank of Canada should immediately resume interest rate hikes. This spectacular job creation comes against a backdrop of equally spectacular population growth…Rate hikes have been very aggressive and will continue to weigh on the economy with some lag…”

The following are the latest interest rate and bond yield forecasts from the Big 6 banks, with any changes from their previous forecasts in parenthesis.