One more hike to come in December, then a pause (nope, not the Fed - HSBC on BoC)

Author: Eamonn Sheridan | Category: Central Banks

The HSBC outlook for Bank of Canada monetary policy is, in brief, a December 25bp hike

The main points from their client note:
  • We now look for the Bank of Canada to raise its policy rate by 25 basis points, to 1.25%, on 6 December
  • Signs that labour market tightening are putting upward pressure on wages tip the balance in our view
  • We believe that the Bank will pause after December's rate hike, leaving the policy at 1.25% through 2018
And, more on what is to come on 2018 (in summary, bolding mine):

BOC has said that the range for the neutral rate is between 2.5% to 3.5%
  • Getting rates to neutral would involve raising rates by between 200 to 300 basis points
However, the BIS has demonstrated that if interest rates increase by 250 basis points Canada's debt service ratio would rise into a danger zone
  • Raising rates to neutral too quickly could prove disruptive to the economy
  • housing-related vulnerabilities
  • potential impact of rising rates on household finances suggest to us that the Bank of Canada need not rush to get rates to neutral.
Instead, we think that the Bank should take a very cautious approach to raising rates beyond the 75 basis points we expect in 2017.

We think that the Bank should await further signs
  • of a firming price environment
  • evidence that business investment and non-energy exports are in sustained upswings
  • and evidence that the household sector is taking a more prudent approach to debt
before removing more monetary stimulus.

We expect the Bank of Canada to maintain a hawkish bias in 2018
  • but to hold off on any further tightening in 2018 to assess the impact of proposed policy moves on the housing and job markets and the impact of the 2017 rate on households.