Economists Warn Bank of Canada Rate Hike May Be Premature
Top Canadian economists say a policy-rate increase by the Bank of Canada this week could be a mistake, citing weak growth and limited inflation pressure despite recent comments from Governor Tiff Macklem.
The Bank of Canada is expected to raise its policy rate to 2.5% on Wednesday, but several leading economists argue the move may be unwarranted. Governor Tiff Macklem’s remarks at an International Monetary Fund meeting, linking higher energy prices from the Iran conflict to stronger growth and inflation risks, have pushed market odds of a hike to 76 percent.
“We can’t see why Macklem would have hastened to make these comments at the IMF meeting, just before the Bank’s media blackout, other than to signal an October hike,” CIBC chief economist Avery Shenfeld wrote.
RBC chief economist Frances Donald said her team’s forecast of a hike reflects policymakers’ communication rather than an economic necessity, adding that “the case for patience is strong.” The bank’s own data show the housing market remains in downturn and GDP growth is expected to have slowed in the third quarter.
RBC also noted that bond yields have risen over 40 basis points in three months, already tightening financial conditions. Shenfeld said CIBC would “respectfully beg to differ” with a rate increase, warning that an early hike could become a policy error.
“Our worry that this could be a policy error is tied to the fact that we aren’t yet sure that ANY rate hikes will be warranted in the coming year, so moving early could be a step that the Bank comes to regret,” Shenfeld added.
Analysts point to upcoming U.S. election outcomes as a factor that could clarify energy-price and trade-related uncertainties for Canada. David Rosenberg of Rosenberg Research called the market’s near-certainty of a hike “astounding,” and cautioned that expectations of another increase in December may be premature.