Canadians got a little relief after facing one of the most aggressive rate hikes in history. At the January meeting, the Bank of Canada (BoC) announced a “conditional pause” on further hikes. That leaves one big question that everyone is trying to figure out—what conditions could trigger further rate hikes?
Bank of Canada Is Worried About Excess Demand
The pause is conditional on excess demand tapering, explained BMO Capital Markets. “From an activity perspective, the Bank has made it clear that the economy is running with excess demand, contributing to inflation pressure,” explained Benjamin Reitzes, Canadian Rates & Macro Strategist at BMO.
It all boils down to any factors that may contribute to excess demand, and spark further inflation. Reitzes sees GDP growth or employment running too hot, as potential warnings. The BoC is currently expecting Q1 GDP to come in flat, with anything higher potentially sparking a path to further hikes, according to the bank.
They’re also watching employment, which has been fueling US growth but has been tepid in Canada. “We’ll get the February employment figures a couple of days after the BoC announcement, and policymakers will be watching closely for signs of ongoing strength that could fuel wage gains and, in turn, inflation,” said Reitzes.
US Inflation Might Spark Higher Rates In Canada
Inflation is still going to be front and center, but he sees the BoC looking at short-term trends. The 3-month annualized growth rate is likely to be in focus, according to Reitzes. They’ll be sensitive to any signs of acceleration, or deceleration. Countries like the US are facing reemerging inflation pressures, and any rate hikes in excess of Canada can spark inflation via a weak loonie.
“The risks remain heavily tilted toward higher inflation, which will keep the BoC’s finger on the rate hike trigger through at least midyear,” said Reitzes.
Bank of Canada Unlikely To Hike This Month
That’s great, but what the heck does that mean? BMO doesn’t see the BoC hiking rates this month, since that would be silly to reverse course after one month. March is also a “mini” announcement, where they don’t publish a full accompanying report. These meetings don’t typically see the central bank change course, since they aren’t providing detailed notes for the public.
Though Reitzes sees the BoC setting the tone at this meeting. “…the Bank will also stress that if economic activity rebounds or inflation presses higher again, they will not hesitate to hike rates,” he said.