BoC Preview: Forecasts from eight major banks, enough evidence to pull the trigger on another 25 bps rate hike

BoC hiked interest rates 25 bps last month having left them untouched since the last hike in January. We don’t see last month’s move as a one-off. To restart the hiking process means that the BoC feels it has unfinished business, and with the jobs market looking tight and inflation running above target we expect the BoC to hike by a further 25 bps.

We look for the BoC to hike another 25 bps to 5.00% in July. Upward revisions in the July MPR will provide the main catalyst for the hike, but we do expect a more balanced statement relative to June after some further erosion of sentiment. We also look for the Bank to leave its guidance open-ended, although we believe 5.00% will mark the terminal rate for the BoC. USD/CAD should move regardless of whether the BoC hikes this week. While a hike would likely resume the recent downturn in USD/CAD, we're wary that a ‘skip’ would produce a stronger reaction.

We’re looking for the central bank to increase its overnight target by 25 bps to 5%, the second hike in as many meetings. This is not a high conviction forecast given the lack of clear guidance as well as the Bank’s history of surprise decisions. Our call for a hike reflects the BoC’s early June assessment that policy wasn’t restrictive enough. We doubt a single 25 bps rate increase last month will meaningfully change that in their minds, and they should therefore judge that another move is needed.

The latest round of Canadian economic data is in – and it’s unlikely to deter the BoC from hiking rates again in July. Nothing in the data on employment, inflation, GDP or the second quarter release of the BoC’s own Business Outlook Survey (BOS) showed sufficient evidence of slowing consumer demand to convince the BoC another hike isn’t needed. The path for the overnight rate – beyond the expected 25 bps increase in July – remains very uncertain. We expect July’s increase to be the last of this cycle. But the BoC has maintained its ‘proactive’ approach when it comes to battling sticky inflation. And it wouldn’t hesitate to hike rates again in September if the economy doesn’t show more signs of cooling off. It is still our view that further deterioration in economic activity is in the pipeline, as households are increasingly challenged by rising costs of living. That should be enough to keep the Bank of Canada on the sidelines for the remainder of this year.

While job vacancy rates have continued to fall, the latest labour force report suggests that May’s drop in employment was nothing more than a statistical anomaly related to volatility in youth employment. The rebound in jobs during June, and an unemployment rate that is still low relative to pre-pandemic norms, may have just tipped the scales towards an immediate hike. Because of that we now forecast a 25 bps hike in July, rather than at the September meeting, although we still suspect that 5.0% will be the peak for the Bank of Canada’s overnight rate.

It’s another close call for the Bank of Canada, but there’s enough momentum in the economy and labour market to tilt the scales toward another 25 bps hike.

While Canadian data has been more mixed since the June BoC meeting, we continue to expect a 25 bps rate hike from the BoC on Wednesday, taking policy rates to 5.00%. As opposed to a backward-looking June hike, where growth and inflation had not slowed as much as expected, the July hike would be forecast-driven, with higher growth and inflation projections in the July MPR likely to be convincing of at least one more rate hike to sufficiently weigh on demand, particularly in the rebounding housing sector. However, the statement is likely to be more neutral expressing continued commitment to bringing inflation back to 2%, but with an acknowledgement that there are signs of inflationary pressures easing. 

Much like June, the July decision appears to be a finely balanced call. The BoC raised rates 25 bps at its June meeting, and for July, we lean toward another 25 bps rate hike, to 5.00%. Mixed recent data make the July decision a close call. While mixed, we believe recent figures have shown enough resilience in activity, and still elevated enough underlying inflation.