The possibility of a rate hike at the start of next year is lower

by Ephraim Vecina12 Dec 2018

The Bank of Canada’s decision last week to keep borrowing costs at the same levels they have been for a while now might have lowered the likelihood of a rate hike at the beginning of 2019, observers said.

“A January rate hike may not occur,” CIBC head of Canadian government credit strategy Maria Berlettano told Bloomberg.

“The rate decision was as expected, but the statement was dovish. The statement acknowledged some new growth concerns and also suggested that there may be additional room for non-inflationary growth.”

The bank’s relatively meek tone lowered investors’ expectations of more increases. The market-implied probability of a hike in January fell below 50%, with only one increase predicted to take place over the next 12 months.

The statement came in the wake of the CMHC’s latest Quarterly Financial Report, which covered July to September 2018. The study predicted accelerated interest rate growth due to the current strength of GDP growth, which is expected to stabilize at 2% this year and 1.9% in 2019, “with the economy operating close to its potential rate.”

Read more: Multiple factors will weigh upon Canadian housing next year

However, while the current rate levels remain “reasonable”, further increases are still definitely not off the table, according to CIBC economist Royce Mendes.

“[BoC governor] Poloz stated that the current level of rates were appropriate for the time being, a possible hint that the bar is high for a move in January,” Mendes wrote in a client note.

“The move in markets [on December 5] was clear, and Governor Poloz didn’t do anything to walk back investors’ dovish interpretation today.”

The central bank has already hiked interest rates 5 times since mid-2017.

 

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