Canada Interest Rate Decision

Discussion and Analysis by Charles Porter:

Canadian interest rate policy changed following the Bank’s last policy decision in July. A movement of 25 basis points to 0.75% continued to encourage the trend of a strengthening of the Canadian Dollar vis-à-vis most international currencies. However, on the back of strong GDP results at the end of August, a consensus on the probability for a further rate hike later today shows that an immediate hike, whilst still unlikely, is significantly more realistic.

The annualised quarterly change in real GDP registered at 4.5% in the second quarter (Q2) of 2017. Such impressive economic growth surpassed both estimates and Q1 performance. Crucially, this economic performance reflects the Canadian economy’s capacity to accommodate and thrive within the new monetary climate. This provides a suggestion that it may similarly accommodate a second hike.

The probability of a rate revision upward from the present 0.75% is quoted to be around 40%. The decision is due at 15:00. The economy’s inflation rate, however, is low and nonthreatening to economic performance. Therefore, with little sign of an overheating economy, a further interest rate hike may be unnecessary, at least until the incumbent rate is better tested.

The strength of the Canadian Dollar against most major international currencies will assist with the diminishment of inflation. A further rate hike, which should appreciate the Loonie further, may even encourage a deflationary pressure as the price of imports becomes cheaper. This would simultaneously hinder the exporting performance of the economy by a de facto loss of (price) competitiveness.

Our analysis team believe that whilst an interest rate hike would not be unthinkable, it is unlikely upon this occasion. We therefore project the interest rate to hold at 0.75%. Having said this, the biases of the Central Bank have proven a willingness to increase the overnight rate target (policy rate) against expectations.