Pace of interest rate hikes seen picking up with trade deal in hand

The new North American trade deal struck on Sunday may open the door for the Bank of Canada to pick up the pace of interest rate hikes, according to economists at some of the country’s biggest banks.

With the introduction of the United States-Mexico-Canada Agreement, an October rate hike by the central bank now appears to be a lock, analysts say, with more expected to follow in 2019.

Bank of Montreal chief economist Douglas Porter said in a note that the deal “is a major relief for Canada, lifting a heavy cloud of uncertainty from the outlook.” He added that BMO is now calling for three rate hikes in 2019, in January, April and July. “Suffice it to say that this deal, along with last week’s solid run of data, all but cements a rate hike at the next policy announcement on Oct. 24 ..., "Porter said. "While rate hikes will likely stay gradual, the pace may pick up slightly more than previously expected over the coming year."

The Bank of Canada had hiked its key benchmark to 1.5 per cent in July, but only did so as officials made it clear that they were closely watching the trade picture. Then, in September, the central bank reiterated that higher interest rates would be needed to keep inflation in check, yet held firm on its policy rate.

Now, the Bank of Canada may be poised for further monetary action. "Markets have responded with a rally in the Canadian dollar, reflecting greater certainty that the Bank of Canada will hike rates in the coming months,” noted Canadian Imperial Bank of Canada economists Avery Shenfeld and Katherine Judge. “The deal paves the way for a rate hike by the Bank of Canada this month, and a followup move that we now see coming in January.”

A new trade agreement could make for a sunnier economic outlook from the central bank as well. Derek Burleton, deputy chief economist at Toronto-Dominion Bank, wrote that the Bank of Canada “had embedded a trade risk discount into their growth forecast of around half a percentage point.”

"With this risk removed, a rate hike later this month looks virtually cemented, while we see the balance of risks shifting toward three additional hikes in 2019 (from two),” he added.