As expected, the Bank of Canada raised interest rates to 0.75%, the first hike in seven years as the Bank cited a robust economy fuelled by household spending. Kim Parlee speaks with Derek Burleton, Deputy Chief Economist, TD Bank, about the implications of the hike and what could be the Bank’s next move.
First time, seven years, the Bank of Canada has increased rates. What was your take on what happened today and what the Bank of Canada had to say today?
Well, not a big surprise. They've been busy prepping the markets that a rate hike is coming. And they followed through with that. And sifting through the monetary policy report that accompanied the statement today, the 30-page-- not a lot of surprises, very bullish in terms of the near-term outlook.
Some of the data since the last update in April has been positive. They upgraded their growth forecast a couple of ticks for this year to 2.8%, which is in line with our view. And some of the risks, though, they downplayed a bit.
And again, they've been communicating this through the medias that, for instance, US policy uncertainty is something they really hung their hats on. Some of the delays in getting policy done makes them feel a little bit better about some of the potential downside risks on the economy from some of the negative trade-related and that kind of-- they downplayed that a bit. So that's a tick in why they hiked rates.
The big thing that we learned is why they think inflation is going to tick up. Because that's really the missing piece. Inflation's been low. And they spent a fair amount of time and coverage today to why inflation will tick up.
It's not just because of the growth outlook. It's because they look at four or five items that they feel will be temporary in terms of their downward pull-- things like auto prices. They see those turning around. Gasoline prices earlier this year have been pulling down inflation, electricity rebates in Ontario.
So they had a few reasons there why they feel inflation will begin to grind higher. Because I think when we look at the outlook for Canada, I think there's concern about whether inflation will move back up to the Bank of Canada's targeted 2%.
The reaction, the loonie, was quite profound this morning, actually, trading over $0.78. And is that because of what you're saying here? Is the Bank saying, this inflation issue is temporary? Therefore, is the interpretation of that that more rate hikes are coming?
Yeah, I think the tone is quite positive in the report. The press conference right after, quite positive. So I think the investors are certainly expecting another follow-up rate hike in October. There's pretty much a full quarter point priced in. I would agree with that. I think it will happen.
There's still debate about what happens beyond October. I think the thinking there is that the Bank of Canada cut rates by 50 basis points in 2015 as an emergency measure given the oil price shock. That's no longer needed. The governor, once again, indicated that today in the press conference. So hence, a follow-up move would be likely. That would reverse the 50 basis points.
The market's still wondering a bit about some of the risks on inflation. So for example, next April, which is when we think the Bank of Canada will next hike them, market's thinking a 50/50 probability. So ultimately, the Bank says it's data depended its decisions. So that leaves room for ongoing debate as to what's going to happen.
Any commentary from the Bank today on housing? I mean, that seems to be our nationwide obsession right now. Any commentary in terms of what they think this rate hike will have on housing?
Yeah, not really. It is cited as a risk. Again, he emphasized macroprudential factors that have been put in place. And along with the rate hike, it's going to bring down housing activity in an orderly way, probably not affecting the very near-term outlook. But it is a reason why growth will moderate and remain closer to the sustainable rate of around 1 and 1/2 or maybe 1 and 3/4 next year. They emphasized that. And it's a risk they're going to monitor.
Ultimately, it comes back to-- even inflation-- that we're going to have to dig further into this subject. There's still a lot we don't understand why global inflation has been surprisingly low. So they don't confess that they have the answers to all these questions. And housing is something they're going to have to watch-- higher interest rates and how that will affect housing demand. So based on their forecasts, it's very much in line with ours-- that housing will moderate in an orderly way, not dragging down the economy too abruptly.
And same thing with household debt. It's something he feels this is a good thing. Higher rates will help to mitigate some of the risks and household indebtedness. But it's something they will be watching very carefully.
Let me ask you about-- just, I guess, moving in lockstep with some of the other central banks, notably the Fed at the same time, some people saying, well, they're doing this to manage interest rate differentials or make sure they're working the same direction as the Fed. Any thoughts around that?
There wasn't any in the press conference. It was still going on as we speak. But there wasn't any questions directly related to external developments or whether this was time to head of the Fed the next rate hike. The way they discussed it was simply that looking at the data, it was time. It's no longer time for the economy to need such low interest rates. A little bit of tightening is important to keeping growth on a sustainable track long term and as inflation grinds higher.
So it could be very speculative. But it is a global story right now. UCB has been communicating that emergency rates are no longer required levels of stimulus. So Canada's just joining the chorus. But they're the first to move above and beyond the Fed.
Joe, thanks very much.