It is widely expected that tomorrow the Bank of Canada will keep the key policy rate unchanged at 1.75%. Analysts at Rabobank, still expect the Bank of Canada to leave rates on hold at the December meeting before raising rates another 25bp in January with the potential for a final 25bp hike in April.
Key Quotes:
“We see the BoC as very sensitive to market signals but with an underlying bias to hike – if a move expected by the market then the Bank will take that opportunity to raise rates. The question becomes, how long will the Bank maintain that stance and what signals can we expect from the market going forward? In terms of the first question, we fully expect the Bank to continue taking its cue from market pricing but expectations are set to diverge substantially after the 9 January meeting. If we take the most dovish end of the Bank’s range for the neutral rate then that would still imply another three rate 25bp hikes from the Bank, if we take the middle of the range then that implies another five rate hikes will be forthcoming. As for the top of the neutral range, a further seven hikes from the current rate seems so unlikely that we won’t even dwell on that for now.”
“We may seem more convinced that the market about a January hike and we also see more chance of an April move than a July move but in essence, we expect rates to stand at least 25bp higher by the end of July with around a 60% chance that we are 50bp higher which is a similar story to the CAD OIS curve. In short, we might be slightly more hawkish than the market in terms of timing, but the size of the move we agree on.”
“Our Fed view is one reason why we don’t expect continued Bank of Canada rate hikes into 2019H2. The BoC might not be in full follow-the-Fed mode but it is hard to imagine that it would be able to continue hiking Canadian rates if the picture in the US sours substantially.”
“As we noted when the BoC changed its stance following the ECB meeting in Sintra, the BoC has partly been raising rates so that it will have room to cut them when the current business cycle turns – we used to hate that argument but it is clearly one factor driving developed world central banks in these times.”
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