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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