Many market observers are predicting the Bank of Canada will raise its key interest rate on Wednesday, and recent national employment data has only intensified these calls.
“A continuing trend of strong economic data… makes it likely that the Bank will announce an increase in the overnight rate, removing one of two emergency rate cuts it made in 2015 as [a] cushion against falling oil prices,” reads a recent TD Economics report.
In June, 45,000 Canadian jobs were created while the unemployment rate inched a percentage point lower to 6.5 per cent, according to Statistics Canada’s Labour Force Survey, June 2017.
This, combined with a pickup in export activity, are two reasons TD is predicting the central bank will increase its historically low policy rate, which influences the mortgage market.
The stronger labour market further solidified BMO Economics’ stance as well.
“Just prior to the June employment release, there was still an active debate on whether the Bank would indeed raise rates for the first time since 2010,” BMO Chief Economist Douglas Porter wrote late last week.
“We believe that they will, and the market and a few stragglers pretty much jumped aboard in the wake of the June jobs data,” he adds.
In fact, all of the Big Six Canadian banks are now on the same page in terms of the central bank’s next policy move — a 25-basis-point hike this week.
But there is at least one high-profile outlier who disagrees.
“Although markets are betting that way, we aren’t fully convinced, mainly because core inflation is still falling and housing market conditions appear to be going from bad to worse,” writes David Madani of Capital Economics.
The economic research company expects the overnight rate to remain at 0.5 per cent for the rest of the year, whereas many other experts have a second hike penciled into their forecasts for this year’s fourth quarter.
Madani suggests recent data is encouraging, but draws attention to how reliant the economy is on the housing market, as well as household borrowing and consumption.
Together, Madani says the three support 90 per cent of the country’s GDP growth.
But with Toronto’s housing market, the nation’s most active, cooling after the Ontario government introduced its Fair Housing Plan, the economy may still need the current low rates to weather the effects.
“Raising interest rates now at this late stage in the housing cycle would be misguided,” Madani states.