BoC: The case for hitting the brakes in October - TDS

Despite the spike in July BoC rate hike expectations, analysts at TDS think it’s a closer call than what is priced in by markets and while July is clearly a live decision for a rate liftoff, they favour October by a hair’s breadth and do not share the sense of macro urgency currently priced in.

Key Quotes

“Relative to July, October remains the ideal timing for a hike in a risk management perspective.”

“By guiding the market to reprice the policy outlook, we think the BoC achieved two key objectives: i) sending a message to households that borrowing rates could go up, and ii) signaling to markets that the Bank has decidedly turned more confident about the sustainability of the recovery, thereby initializing a healthy tightening in financial conditions.”

“Overall, the costs of hiking in July likely outweigh the benefits. Hiking in July would reflect negatively on the BoC’s forward looking credibility, as the economy is largely in line with the April MPR and a nudge above the January MPR, when the Bank expressed a dominantly dovish bias, citing “material slack.”

“A July hike could also further front-load rate expectations and fuel CAD, an outcome that the BoC does not welcome at this stage of the business cycle. An early hike is likely to support market sentiment for back-to-back 25bp hikes at MPR dates.”