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Where Do Interest Rates Go from Here?

Where Do Interest Rates Go from Here?

by Yvonne von Jena | January 29, 2018

On January 17th, the Bank of Canada increased its overnight rate target to 1.25%. Here’s how we got here and where rates are expected to go.

How we got here

The central bank pointed to unexpectedly solid economic numbers as key drivers behind its decision. It had been widely expected to raise its rate after data in recent months showed gross domestic product (GDP) growing, the job market healthy and the cost of living ticking higher.

The increase followed hikes in July and September 2017, which at the time were in response to a surprisingly strong economic run that began in late 2016. The bank's benchmark rate is now at its highest level since 2009.

In response to this recent rate hike by the central bank, many lenders increased their own prime lending rates. As of January 18th, all five big banks now have the same prime lending rate of 3.45%, up from 3.2% prior to the central bank’s move. This, in addition to new stress testing requirements put in place, are expected to put pressure on home buyers and refinances.

Where do we go from here?

So where do rates go from here? It seems that most economists expect rates to continue to increase. 

Here’s a summary of Canada’s top economists’ estimates, from the Financial Post:

 BMO: Douglas Porter, Chief Economist

  • Two more hikes in 2018, ending the year at 1.75%, but next hike not until July (unchanged from its prior call).

Capital Economics: David Madani, Senior Canadian Economist

  • Hike in spring, probably April, followed by a rate cut before year-end.
  • In contrast to the consensus, we wouldn’t bet too heavily on further rates hikes beyond the spring, however.

CIBC: Avery Shenfield, Chief Economist

  • One further hike this year, early in Q3, and a further 50 bps in 2019.
  • Today’s rate hike was a rear-view mirror move, but the Bank of Canada hints that the view out the front window isn’t quite as sunny.

Gluskin Sheff: David Rosenberg, Chief Economist

  • The Bank did say that higher rates would be needed over time, but there was absolutely no sense of urgency at all on this score…
  • Another hike, let alone two or three, is hardly baked in the cake.

RBC Dominion Securities: Mark Chandler, Head of Canadian Rates Strategy

  • Three more hikes to leave the overnight target at 2% by the end of 2018.
  • We concur with the Bank’s assessment that “some accommodation will likely be needed to keep the economy operating close to potential and inflation on target” and we believe that the Bank will need to slow the pace of rate hikes in 2019.
  • We currently have the overnight rate holding at 2.25%, below the 3.00% mid-point of the Bank’s estimated neutral rate range, largely reflecting the impact of higher rates on high household debt.

TD Economics: Brian DePratto, Senior Economist

  • Gradual pace of tightening is most likely, with the next hike penciled in for July.
  • Emergency level rates may not be needed, but that doesn’t mean that the Bank is in a rush to continue hiking.

Data dependency of course means that this is not a lock. Developments in Stephen Poloz’s list of areas to watch, including interest rate sensitivity, labour market developments, and inflation dynamics could easily bring the next hike forward, or push it back.