Photo: James Bombales

The Canadian economy’s recent strength has a number of market observers predicting the Bank of Canada will again increase the overnight rate before the New Year’s Eve ball drops this year.

Canada’s economy expanded once more in May — this time by 0.6 per cent, according to Statistics Canada — resulting in the seventh straight month of growth.

In fact, 14 of the 20 industrial sectors the national statistical agency looks at grew in May, although real estate and rental and leasing, which had grown in each of the past five months, shrunk by 0.2 per cent.

Nonetheless, TD Senior Economist Brian DePratto called the report results part of a string of “encouraging economic data” and noted it’s “likely” the Canadian economy hasn’t seen first-half gains like this since 2004 at least.

“The near-term robustness of the Canadian economy will likely allow the Bank of Canada to carry through with another interest rate increase this fall, completing the removal of the 2015 emergency stimulus, and consistent with the rapid change in their communication tone,” DePratto writes in a note.

That change in tone was on full display as early as late June, when Bank of Canada Governor Stephen Poloz said two cuts to the overnight rate in 2015 had “done their job.”

Amid plunging oil prices, the Bank of Canada cut the overnight rate by 25 basis points each in January and July of 2015.

The rate remained at a historically low 0.5 per cent until July 12th, when the Bank of Canada hiked it for the first time in seven years.

The move was widely expected, although Capital Economics, a notoriously bearish UK-based research firm, had recommended against the move.

Now, because second-quarter growth outpaced the central bank’s estimate — an annualized increase of 3.5 was recorded compared to the expected 3-per-cent growth — David Madani, senior Canada economist at Capital Economics, suggests the next Bank of Canada rate hike could be little over a month away.

“This increases the odds of another interest rate hike this year, possibly as soon as September,” writes Madani in another note.

In a separate data response, BMO Chief Economist Douglas Porter says Canada’s economy is now on pace for GDP growth of around 3 per cent this year.

“With this powerful momentum, even if some of it is a passing phase, it will take a lot to knock the Bank of Canada off its gradual tightening path,” Porter states.

The Bank of Canada is scheduled to make its policy announcement on September 6th.

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