TORONTO (Reuters) - The Bank of Canada raised interest rates on Wednesday, surprising many, and said future moves will be guided by economic data, financial market developments and the sensitivity of indebted households to higher rates.
PAUL FERLEY, ASSISTANT CHIEF ECONOMIST, ROYAL BANK OF CANADA
“We thought that low inflation might keep them on the sidelines at the September meeting. Although they acknowledged it, it obviously wasn’t sufficient to keep them on the sidelines, the pace of growth being as strong as it is has been resulted in them coming to the conclusion that the stimulus in place was no longer required.”
“Given the strong growth numbers we thought there was a risk they would move in September but we leaned towards them holding off until October.”
“They obviously feel that the inflation number is a lagging indicator and the growth numbers are so strong that inflation pressure will start to emerge.”
“They had given indications that they would remove that 50 basis point cut in the wake of the drop in oil prices, with this move that has been reversed. I think the pace going forward is data-dependant. I think the low inflation does warrant the pace being fairly moderate but we are still expecting rates to move higher.”
“Given the momentum in the economy it’s possible the bank could go again in the fourth quarter and continue into 2018.”
“In terms of the tone of the statement, it’s very constructive ... we have a hike and it (the tone) hasn’t been moderated at all. There is no sense that the Bank of Canada looks to be moderating the tighter path from here. For them, it’s still a very data dependent outlook.”
“The immediate piece (for the Bank of Canada) was removing the stimulus that they delivered in 2015. In terms of the medium term outlook, that will still be determined by the data.”
“It’s a bit of a surprise that they moved today rather than waiting a month or so. But I guess they felt the economy was too strong for their comfort and raises inflation risks.
“They really did seem intent on unwinding the 50 basis points of rate cuts from 2015, so today’s move basically accomplishes that aim.
“If the economy remains exceptionally strong, it could very well follow up today’s move with another rate hike as soon as October. But they’re also keeping a very close eye on the sensitivity of households to higher interest rates, the sensitivity of the Toronto housing market to higher interest rates. I think that probably warrants some caution on their part.
“Our general view is that probably the best economic news is behind us. We will see the economy moderate in the second half of this year and through next year. If that’s the case, the Bank of Canada will slow the pace of tightening and the Canadian dollar will probably back off from current highs.”
Reporting by Solorina Ho, Alastair Sharp and Fergal Smith; Editing by Denny Thomas