In an otherwise quiet week for financial markets, the Bank of Canada’s (BoC) July monetary policy decision on Wednesday will be the undisputed headline act.
In the space of just a few weeks, expectations of a rate hike have moved from highly unlikely to highly probable, fuelled by a series of hawkish comments from leading BoC officials and strong Canadian economic data.
Another strong jobs report for June, released last week, revealed a robust lift in employment of 45,300, and helped to cement those views.
However, while financial markets now put the probability of a 25 basis point hike on Wednesday at around 90%, not everyone shares the view that a rate hike, the first from the BoC since late 2010, will arrive in just a few days.
Michael Cahill, strategist at Goldman Sachs, is one who thinks that the BoC will refrain from hiking rates on this occasion, suggesting in a note released late last week that market pricing at this point “looks like an oversteer”.
“While certainly a close call, we expect the BoC to hike rates for the first time in October, not next week,” he says.
“Our view is that the decidedly hawkish BoC communications were a direct response to the lack of market reaction to the incremental hawkish changes at recent meetings.
“When markets did not pick up on subtle hints, the BoC decided to be blunt. But that does not necessarily mean that a hike is days away.”
So rather than signaling that a rate increase is coming in July, hawkish remarks from the BoC delivered in June were designed to prepare markets for higher rates in the medium-term, in Cahill’s opinion.
As seen in chart below from Goldman, it’s clearly been successful on that front. Expectations for the BoC’s policy rate — currently 0.5% — have lifted substantially in recent weeks.
And while he admits that recent data has been strong, the one area of concern remains tepid inflationary pressures, something that Cahill suggests could see the bank hold off hiking on this occasion.
“The weakness in inflation data should give the BoC pause,” he says.
“The recent inflation miss is a mark in that direction.
“The BoC — and governor Poloz in particular — have a reputation for being strict inflation targeters, and that should still matter now.”
However, while Cahill thinks that interest rates will be left unchanged this week, he still thinks that hikes are coming, admitting that they are “completely warranted”.
“The economy has improved, the risk of the oil shock spilling over to a larger disinvestment cycle has subsided, and the economy should further benefit from stronger global growth,” he says.
“Whether this week or a bit further down the road, the message is clear: rate hikes are coming.”
Cahill says that whenever the bank delivers its first hike, a second is likely to follow soon after, helping to reverse the two rate cuts delivered by the bank in 2015 in response to tumbling crude prices at the time.