Bank of Canada governor hints interest rates may rise, but BCREA predicts not until next year
With Canada’s economy strengthening and key policymakers’ speeches and interviews hinting at a forthcoming rise in interest rates, the loonie has risen to a four-month high.
The speeches follow the US Fed’s strong moves in raising rates three times in seven months, with more US rate hikes likely to be on the horizon.
Canada has seen historic low interest rates over the past few years – but Bank of Canada Stephen Poloz told CNBC in Europe earlier today that, “It does look as though cuts have done their job… We certainly need to be at least considering that whole situation [of raising rates] now that excess capacity is being used up steadily.”
However, Poloz added, "The US [is] obviously way out in front. Canada [is] some distance, perhaps as much as two years, behind, given the oil shock.”
This two-year lag jives with predictions in the British Columbia Real Estate Association’s latest Mortgage Rate Forecast, released June 28.
The BCREA conceded that the chances of an interest rate hike had increased recently, but predicts that this will not come to fruition until early 2018.
The report said, “While the economy is currently very strong, Canada has had several false alarms when it comes to an imminent increase in interest rates. The case for Bank of Canada tightening this time around, however, may be stronger than in the past.”
The BCREA reiterated Poloz’s sentiment that 2015 rate cuts had “done their job” to deal with the oil crisis as one of two reasons why interest rates might rise.
“Firstly, a rate increase of 25 basis points would mainly undo the rate cut made in 2015 to deal with the dramatic decline in oil prices. With the macroeconomic consequences of that oil shock dissipated, there is no longer a need to keep interest rates at their current level.
“Secondly, rapid growth in the Canadian economy means that slack in labour and products markets is being eliminated faster than expected, which should begin to put upward pressure on inflation, with a return to the Bank’s two per cent inflation target sooner than currently projected.”
However, contrary to some predictions that the rise could happen as soon as next month, the BCREA said it does not think interest rates will go up this year.
“While the likelihood of the Bank raising its target rate by the end of 2017 has certainly increased, we still expect the Bank to hold off until early 2018, particularly if oil prices remain low and inflation fails to pick up.”