BoC: To hike or not to hike? – ING

James Smith, Developed Markets Economist at ING, suggests that a rate hike from Bank of Canada at its next meeting shouldn’t be completely ruled out, although there are risks – most notably Nafta.

Key Quotes

“Canadian Foreign Minister Chrystia Freeland has said that she still thinks a Nafta deal is possible, despite the recently imposed US steel and aluminium tariffs.”

“The key remaining sticking points for Nafta continue to be auto content rules, the ‘sunset clause’, government procurement, agricultural laws and dispute settlements. Our base case is that a Nafta deal will be made, although of course the big question is ‘when’.”

“In terms of the Canadian economic environment, growth moderated in the first quarter but still remains robust and in line with the Bank of Canada’s forecasts.”

“Meanwhile, inflation is set to continue its bout of strength – markets are expecting May’s headline figure (released tomorrow) to come in at 2.5% year-on-year, riding the wave of higher oil prices.”

“Assuming this trend continues, the Bank will need to make a choice between maintaining its price stability mandate and offsetting ongoing trade uncertainty.”

“The next Bank of Canada meeting is due to take place on 11 July, the first gathering since it dropped its cautious tone back in May. Markets are pricing in a 67% chance of a rate hike, down slightly from around 80% earlier in June. Although the odds of a July hike are falling we don’t think it should be completely ruled out yet.”