Bank of Canada Expected To Hold Interest Rates Steady In October, Say Economists

Expectations that the Bank of Canada will raise interest rates later this week have been dampened by recent economic uncertainties and indicators that show Canada’s economy slowing.

Many analysts say they now expect the Bank of Canada to hold interest rates at their current levels after back-to-back rate increases of a quarter of a percentage point during the summer months.

Avery Shenfeld, Chief Economist at CIBC Capital Markets, has said that the central bank may have trouble processing the end of NAFTA, if that were to occur, as well as judging the impact of new and tougher rules for uninsured mortgages and the growth and inflation effects of the coming minimum wage increase in Ontario. Mr. Shenfeld also noted that the Canadian economy’s performance following the Bank of Canada’s September rate hike won’t be fully understood until March 2018 at the earliest.

“So the only logical conclusion is that the Bank of Canada will simply have to wait and see whether growth and inflation trends compel a further tightening,” wrote Mr. Shenfeld in an analyst’s report. “If the Bank needs to ‘monitor’ how the economy is doing with higher rates and other changes in the landscape, we won’t see the next rate hike until the spring of 2018.”

The Bank of Canada’s next interest rate announcement is set for this Wednesday (October 25th). It will follow Consumer Price Index figures for September that showed inflation rose 1.6% on a year-over-year basis, driven by a 14.1% jump in gasoline prices influenced by Hurricane Harvey. The Canadian dollar has also gained in value against its American counterpart in recent weeks, shooting up above U.S. 80 cents and hovering around that level currently.

Bank of Canada Governor Stephen Poloz said last month that there “is no predetermined path for interest rates from here,” indicating a wait and see attitude by the central bank.

“Monetary policy will be particularly data dependent in these circumstances and, as always, we could still be surprised in either direction,” said Governor Poloz in a news release.

TD Securities has said that inflation, plus a 0.3% drop in August retail sales, could play into the central bank’s thinking as well.

“Overall, the dual reports take the pressure off the October meeting but in our view should keep rate hike expectations alive going forward,” said TD Securities in a report summary.

Derek Holt, Head of Capital Markets Economics at Scotiabank, said the inflation figures showed “slightly further progress” towards the Bank of Canada’s target, but that “all data, however, risks exaggerated reactions in the face of NAFTA risks.”

“No policy rate change is expected,” Mr. Holt said of Wednesday’s meeting in another note. “While we continue to forecast a hike in December, I have reduced confidence in such expectations.”