Bank of Canada expected to hold steady on interest rates

Economists expect the Bank of Canada will hold firm when it announces its next decision on interest rates on Wednesday.

Factoring in regulatory changes that are shaking up Canadian housing markets and uncertainty on the trade front, the central bank is widely forecast to leave its key target for the overnight rate unchanged at 1.25 per cent.

The overnight rate is what major financial institutions borrow and lend at for one-day funds among themselves. Movements in the Bank of Canada's target for the overnight rate influence other interest rates, such as those for consumer loans and variable-rate mortgages.

At this time last year, the target for the overnight rate stood at a record low 0.5 per cent, but since then the Bank of Canada has embarked on a course of gradual tightening of monetary policy, boosting the rate three times by one-quarter of a percentage point each time.

BMO economist Benjamin Reitzes said in a recent commentary that since new mortgage rules kicked in on Jan. 1 of this year housing sales have slipped more than 20 per cent.

"With sales yet to stabilize, it's hard to imagine the [bank] will opt to tighten policy further and increase the downside risk to housing," he said. 

"With much uncertainty remaining and a third consecutive quarter of soft growth, we anticipate the [Bank of Canada] will hold policy rates steady at the May 30 meeting," Reitzes said.

July hike expected

"However, our expectation that housing will at least stabilize in [the second quarter] and that the data will turn more positive underpin our call for the next rate hike to come in July. Data dependent … that's all there is to it," he said.

According to information from Bloomberg, the implied odds of a rate hike Wednesday stood at about one in six. That's well down from the almost 50 per cent per cent implied odds back on April 19, the day after the central bank decided to keep its overnight rate steady last time.

Economists at CIBC said first-quarter growth figures for the Canadian economy to be released Thursday are expected to show GDP grew at a two per cent rate, ahead of the central bank's expectation of 1.3 per cent. Despite that, they don't see Bank of Canada governor Stephen Poloz rushing to tighten rates.

"We still think it will take a little more for central bankers to feel comfortable hiking rates again," economist Royce Mendes said in a commentary. "We're sticking to our call that [Poloz] waits until July to pull the trigger. By that time, data will likely be pointing to an above-two per cent growth pace for Q2," Mendes said.

TD senior economist Brian DePratto noted that first-quarter growth in Canadian GDP may come in above the Bank of Canada's April forecast, "but with housing markets still in an adjustment phase and considerable external uncertainties, no change in monetary policy is expected."

Scotiabank economist Derek Holt said the central bank is in the "awkward position of having to run the risk of an overheating economy that would otherwise require tighter monetary policy if it were not for key sources of heightened uncertainty, particularly of late."

"Should those sources of uncertainty diminish, then the [bank] may have to tighten monetary policy at an expedited pace thereafter," Holt said.

As of Tuesday, the implied odds of a rate hike on July 11 — the next scheduled Bank of Canada decision date — were running at almost 55 per cent.

It means even if the bank does the expected and stands pat on Wednesday, it's unlikely to stay on the sidelines for long.