Rate hike expected in October

Stronger-than-expected growth in the Canadian economy in May points to another interest rate hike this fall but economists don’t think it will happen at the next Bank of Canada rate announcement in September.

On Tuesday, Statistics Canada said the Canadian economy grew by 0.5 per cent in May thanks to strong performances by both domestic and exportoriented sectors.

That was above market expectations of 0.3 per cent, said Josh Nye, senior economist with RBC Economics Research, who pointed out that with activity rising month-over-month in 19 of 20 industries, it was the most broadly-based gain in more than a decade.

“Today’s solid growth numbers simply improve our confidence that the overnight rate is set to move higher again this year,” he said, adding that he believes the Bank of Canada will hold off until October to raise rates.

The central bank raised interest rates for the fourth time in a year in July and has indicated that more hikes are coming as economic growth raises the risk of inflation heating up.

The Bank of Canada has forecast GDP growth of 2.8 per cent in the second quarter ended June 30, slightly less than analyst expectations of 3.0 per cent.

CIBC Capital Markets chief economist Avery Shenfeld said he also expects a rate increase in October but added the central bank will leave rates alone after that until 2019.