I posted up a couple of earlier previews:

Keeping with the balance theme, here is Scotiabank expecting a hike and Bank of Montreal not expecting a hike


Expect the Bank of Canada to raise its overnight rate by 25bps

  • We expect a neutral-hawkish bias in a nod to how there are further hikes to come beyond simply unwinding the two 25bps cuts in 2015.
  • We believe the central bank remains on the path toward raising its policy rate by about one full percentage point by the end of next year in a more front-loaded set of moves-and likely more increases than priced in by markets through 2018.

Growth has been far exceeding the Bank of Canada's forecasts for an extended period.

  • The Canadian economy has grown by 4.2%, 2.7%, 3.7% and 4.5% from 2016Q3 to 2017Q2, respectively.
  • That translates into a four quarter average growth rate of 3¾% which far exceeds the experiences of Canada's developed economy peer set.
  • One might quip that Canada has achieved US President Trump's wish of 4% growth for his own country.
  • The economy has surpassed everyone's expectations by leaps and bounds and especially in the case of the perma-bears.

... the risk bias at the BoC has to sharply shift toward taking out insurance against upside risks.

  • The interest-sensitives are being led by strong growth in consumption that also got a hefty boost from Ottawa's sharply enriched childcare benefits.
  • Spare capacity is shut and the economy is tripping into excess aggregate demand.
  • There is no need for emergency life support-if there ever was.

All three core inflation measures appear to be bottoming especially once controlling for some one-offs like auto prices.

  • Even alongside higher rates, our models suggest core inflation to be materially closer to the BoC's 2% inflation target by the end of 2018.
  • Without rate hikes there is a risk that inflation will overshoot its target for an extended period of time.

Export growth is benefitting from past adjustments to the smoothed level of the currency and from income growth abroad particularly in the US economy which appears to be continuing into Q3.

Of course hiking ... is not a slam dunk.


The June and Q2 GDP data have increased the intrigue

  • Despite the strong growth prints, we continue to expect rates to remain steady at 0.75%.
  • Markets are pricing a decent chance of a hike.

This is a non-MPR meeting, so we'll just get a statement from the Bank.

  • That's part of the reason another hike isn't likely at this juncture.
  • Indeed, Governor Poloz and Senior Deputy Governor Wilkins emphasized that the Bank wants to avoid slamming on the brakes; hiking in consecutive meetings would deliver a message along those lines.
  • And, only having a statement makes it difficult to effectively communicate otherwise.

In addition, Mr. Poloz's words that he'll be evaluating the economic backdrop quarter-by-quarter are a strong suggestion that October is the next date for a potential hike.

  • And, the BoC has been in radio silence since July, providing absolutely no messaging at all.
  • That's a stark contrast from the lead-up to the July hike when a number of BoC officials were paraded out to deliver the message that a hike was coming.

We continue to anticipate a follow-up hike will come at the October meeting and are concerned that a September hike could sharply strengthen the Canadian dollar and tighten financial conditions more than the Bank would like.

While no move is expected at the September 6 meeting, it won't be just a placeholder for the Bank.

  • We anticipate Governor Poloz will use this statement as an opportunity to emphasize that the Bank remains in no rush to tighten beyond the next 25 bps (which will reverse 2015's emergency rate cuts).

Looking back to the July policy meeting, this snippet from Governor Poloz's opening statement caught our eye: "The economy is absorbing excess capacity more rapidly than we projected in April, and it now appears that the output gap will close around the end of this year. That will nevertheless leave some slack in the labour market. As output growth continues to exceed potential, we expect companies to invest in additional capacity and draw from this slack in the labour market, thereby expanding potential output further. This process is difficult to forecast but is likely to become increasingly evident as we approach full potential."

  • The emphasized sections highlight, that even when the output gap is closed, the BoC is likely to remain patient until they see signs that inflation (and wages in particular) is picking up (and there was some sign of that in the June SEPH report). That would be exactly how the Fed seems to be proceeding, with the labour market gap effectively closed in the U.S., but a lack of wage/inflation pressure is keeping the Fed on a very cautious tightening trajectory.
  • Expect this message to be reinforced in the September statement. That would temper expectations for 2018 rate hikes, which are now even more aggressive than what markets are pricing for the Fed.


So there you have it, 4 bank previews (links to the other two are at the top of the post ICYMthem).

Over to ForexLive traders for their thoughs now ... hike or no hike? FWIW I find BMO pretty convincing and am voting 'no'.