Tuesday, June 27, 2017

From “prepare for the rate hike on July 12” to “oh, wait”

Last week, the time between the news story: “a rate hike might be closer than we think”, to the news story: “the Bank of Canada can take its sweet time before raising rates” was just one day. The report on the inflation rate in May, published on June 23, made all the difference. 

Before the inflation numbers came out, retail trade growth, reported on June 22 (0.8% higher over the previous month) fuelled expectations that interest rates may need to be raised on July 12 when the Bank of Canada is next due to have an Interest Rate announcement. Although the Bank’s representatives had never stated or even implied that it may actually happen on July 12, traders assigned a 50% chance of an increase on July 12 (business.financialpost.com), based on a number of fundamental and subjective factors.

The inflation reading, 1.3% in May, down from 1.6% in April, cooled forecasts for a rate hike. This level of inflation was below the Bank of Canada’s and expert expectations and was among the lowest for developed economies.

Going forward, two factors may influence timing on a rate hike.  One, the Bank of Canada has been lately playing down the importance of inflation as a factor in its macroeconomic policy decisions. Two, the renewed weakness of oil prices and the deceleration of real estate prices may lower the need for a rate hike in the immediate term.

Ukrainian Credit Union Limited

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