Analysts are updating their interest-rate-hike expectations for the Bank of Canada’s January meeting in light of Friday’s supportive employment data, which sent the Canadian dollar to its highest level since late September.
The BOC, which is in the process of normalizing its monetary policy just like the Federal Reserve in the U.S., raised interest rates twice in 2017, causing huge rallies in the Canadian dollar. But Governor Stephen Poloz sounded increasingly dovish in the last quarter of the year.
But with Friday’s strong data, the second straight strong reading, strategists are moving to adjust their expectations for the central bank’s Jan. 17 interest-rate announcement. The current rate is 1%.
Canada’s Labor Force Survey showed that 78,600 jobs were added in December, eclipsing the consensus estimate of a 12,500 decline. The unemployment rate slipped to a four-decade low of 5.7% from 5.9%.
The loonie USDCAD, -0.6006% as Canada’s currency is also called, correspondingly rallied against its U.S. rival, with one dollar last buying C$1.2409, reflecting the heightened hopes for an increase in interest rates.
Before the data, the likelihood of a January rate hike was about 40%, but the report boosted that. The market chatter is for two hikes from the BOC this year,” said Minh Trang, senior FX trader at Silicon Valley Bank.
“Two back-to-back blowout months of hiring brought the nation’s unemployment rate to its lowest level in 41 years in December and increases the odds that the Bank of Canada will deliver its first interest rate increase of 2018 at its January meeting, sooner than the previously expected March meeting,” said Omer Esiner, chief market analyst at Commonwealth Currency Exchange.
Similarly, Scotiabank updated its BOC rate call to January from April on the back of Friday’s developments, said the bank’s currency strategist Eric Theoret in emailed comments.
Still there is reason for some caution amid all the euphoria. After all, Poloz changed tone to sound rather dovish in the last months of 2017 after delivering the second rate hike. In comments, he talked about the negative impacts of a too strong loonie and reiterated the importance of data with particular focus on inflation, which is so hard to come by for Canada and its peers.
Stubbornly low inflation against a backdrop of economic growth has been a persistent issue for developed economies with the exception for the U.K.
And even just three weeks ago, Poloz said that “the facts that the economy is operating near its capacity, and that growth is forecast to continue to run above potential, together pose an upside risk to our inflation forecast.”
“At the same time, our belief that there remains some slack in the labor market poses a downside risk to our inflation forecast. Given the unusual factors at play, the bank is monitoring these risks in real time — the term we use for this is ‘data dependent’ — rather than taking a mechanical approach to policy setting,” Poloz said.