‘Unlikely to be the last’: What economists are saying about the Bank of Canada rate hike

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The Bank of Canada raised interest rates 25 basis points to 4.75 per cent on June 7, breaking a conditional pause put in place after the last hike in January.

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The latest increase brings the benchmark lending to a level last seen in May 2001.

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“The hike surprised the consensus and us,” Josh Nye, an economist with Royal Bank of Canada, said.

Inflation that reaccelerated in April, stronger than expected gross domestic product in the first quarter and a resurgent housing market were clues a hike was “in the cards,” said Stephen Brown, economist for Canada at Capital Economics, in a note.

Bank of Canada governor Tiff Macklem last month warned he was prepared to increase rates if it appeared inflation could remain stuck above the bank’s two per cent target rate.

“Ultimately, Governing Council raised the policy rate because they think monetary policy isn’t sufficiently restrictive to bring inflation back sustainably to two per cent,” the Bank of Canada said in a statement announcing its decision.

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Here’s what economists think about the increase and where they think the bank will go from here.

Stephen Brown, Capital Economics

“The Bank of Canada’s 25 basis point interest rate hike today is unlikely to be the last, with the rapid turnaround in the housing market and concerning underlying inflation dynamics raising the case for at least one more hike in July, to take the policy rate to five per cent.

“The 25 basis point interest rate hike today, to 4.75 per cent, was anticipated by only ourselves and three other forecasters (out of the 28 polled by Reuters), but it would be a stretch to call it a shock decision following the recent upside surprises to inflation and GDP, as well as signs that house prices surged last month.

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“In the important concluding paragraph of the statement, the bank noted that the decision to hike was based on the view that ‘monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the two per cent target.’ It is hard to see how a single 25 bp hike will materially change that assessment unless the CPI and labour market data before the July meeting — in just five weeks’ time — is materially weaker than we currently expect. Accordingly, there is a strong chance of the bank enacting another 25 basis point (increase) at the next meeting ahead of its summer break. As there is no press conference after this announcement, we will have to wait for the speech from deputy governor Paul Beaudry (on June 8) to hear more about the bank’s latest thinking and whether another hike is on the cards.”

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Benjamin Rietzes, BMO Economics

The Bank of Canada raised its policy rate 25 bps to 4.75 per cent, with the market about 50/50 heading into the meeting. The tone of the statement was pretty hawkish, which is not a surprise given the recent data flow.

“If the data remain firm over the coming few weeks, another 25 basis point hike in July looks likely. We’ll get more details on the decision from deputy governor Beaudry tomorrow when he delivers the Economic Progress Report.”

Josh Nye, RBC Economics

“We thought the BoC might wait until July to accumulate a few more data points and refresh its forecasts, but consistent with a proactive approach throughout this tightening cycle, Governing Council surprised the consensus (and us) with a 25 basis rate hike. While governor Macklem sounded like he was in no rush to raise rates at his FSR press conference in mid-May — focusing on broader CPI trends rather than the April miss and downplaying the rebound in housing — today’s policy statement reads like there was little doubt that a hike was appropriate. The BoC’s key message is that “excess demand in the economy looks to be more persistent than anticipated” and there is growing risk that inflation “could get stuck materially above the two per cent target.

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“With Macklem’s ‘accumulation of evidence’ criteria having been met, Governing Council determined monetary policy was not sufficiently restrictive to return inflation sustainably to target. The concluding statement doesn’t include a clear tightening bias but our expectation has been that if the BoC was coming off the sidelines, they would intend to hike more than once — if 4.5 per cent wasn’t restrictive enough it’s hard to think 4.75 per cent is. Governing Council laid out its now-familiar criteria for future policy decisions: the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour. It’s an unusually short five weeks until the July rate decision, but that period is packed with key releases including two employment reports, another CPI reading, an updated April GDP estimate and May flash, and the Q2 Business Outlook Survey. The onus is clearly on that data to soften broadly to preclude another rate hike, and timing a slowdown has been challenging.”

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