Rate hike expectations prop up dollar

With the Bank of Canada nearing its next policy decision, governor Stephen Poloz is reiterating the message that his 2015 interest-rate cuts appear to have done their job.

Poloz said in an interview broadcast on business news channel CNBC that the Canadian economy enjoyed “surprisingly” strong growth in the first three months of 2017 and he expected the pace to stay above potential.

The Canadian dollar climbed to a four-month high of 76.44 cents US after Poloz’s comments, which fed speculation about a Bank of Canada rate hike as early as its next scheduled announcement in two weeks. The boost lifted the loonie from an average price of 75.83 cents US on Tuesday.

If the central bank increases its key rate, the big Canadian banks will raise their prime rates, driving up the cost of variable rate mortgages, other loans and lines of credit tied to the benchmark rate.

Poloz credited the two rate cuts introduced by the bank in 2015 for helping the economy counteract the effects of the oil-price slump, which began in late 2014. The reductions also helped increase the speed of the adjustment, Poloz added.

“It does look as though those cuts have done their job,” said Poloz, who was in Portugal on Wednesday to participate in a forum hosted by the European Central Bank.

“But we’re just approaching a new interest rate decision so I don’t want to prejudge. But certainly we need to be at least considering that whole situation now that the capacity, excess capacity, is being used up steadily.”

More “hawkish” statements in recent weeks by Poloz and the bank’s senior deputy governor, Carolyn Wilkins, have suggested the bank is moving closer to its first rate increase in nearly seven years.

A softer-than-expected inflation report last Friday led some analysts to believe the bank might wait until the fall or later before introducing a rate increase.

But economists interpreted Poloz’s latest remarks Wednesday as a signal the bank may even hike the benchmark as early as its next announcement on July 12.

“He’s not going to give it away, but that’s a pretty solid signal that a July rate hike is very much on the table,” BMO chief economist Doug Porter wrote in a research note to clients.