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 agreement “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, barring something truly shocking over the next three weeks," 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. The pause came as the bank said it was “monitoring closely the course of NAFTA negotiations and other trade policy developments, and their impact on the inflation outlook."
Now, with the worst of the NAFTA-related drama seemingly behind it, 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.
A seeming sigh of relief rippled across the markets Monday, with Canadian stocks and the loonie gaining strength after the proposed successor deal to NAFTA was announced.
The Canadian dollar was up approximately 0.8 per cent against the U.S. greenback as of Monday evening, topping US78 cents.
Further rate hikes could keep the rally in the Canadian dollar going. Capital Economics said in a note that if investors “come round” on its prediction of rate hikes in October, and then as soon again as
While rate hikes will likely stay gradual, the pace may pick up slightly more than ... expected over the coming year.
January, “the loonie could appreciate above our year-end forecast, of $0.78, to perhaps $0.80.”
Meanwhile, the S&P/TSX Composite Index also edged up Monday, gaining nearly 0.2 per cent for the day.
Among individual Canadian stocks, auto-part-makers Linamar Corp. and Magna International Inc. saw their share prices rise on the news of a truce of sorts between the federal government and the White House on the latter’s threats of car tariffs.
Linamar’s stock price increased 6.3 per cent for the day, finishing at $63.26, while Magna shares rose about 2.2 per cent to close at $69.36.