GDP growth rate drastically raises odds of interest rate hike

The Canadian economy is growing at its fastest pace in 15 years, leading to observers revising their timetables for a BoC hike

GDP growth rate drastically raises odds of interest rate hike
With Canada’s economy growing at an astounding clip in the second quarter, analysts have changed their calls for a Bank of Canada interest rate hike from October to this month.

The GDP growth rate of 4.5 per cent, which was the fastest in 15 years, surpassed even the most optimistic estimates by Canadian economists. The pace has dramatically raised the odds of a hike in September up to 50 per cent, according to September 1 overnight index swaps market data.

“While we do expect growth to simmer down somewhat in the second half of the year, we would readily allow that all of the economic surprises have been to the high side in 2017,” BMO Financial Group chief economist Douglas Porter told the Financial Post. “In what has become almost a seemingly monthly ritual in 2017, we are nudging up our call on Canadian GDP growth yet again to 3.1 per cent for the year and 2.5 per cent for Q3 — and would readily allow that there is some upside risk.”

CIBC economist Avery Shenfeld argued that the timetable for the hike is much tighter, as the BoC could be expected to increase rates this week.

“After [last week’s] blowout GDP figures, we now see little reason for the BoC to wait before hiking interest rates again,” Shenfeld wrote in a client note, adding that an increase will likely be accompanied by a statement “to remind Canadian dollar bulls that they will be very patient on further hikes.”

TD Economics senior economist Brian DePratto agreed, noting that a near-future rate hike is “almost certainly a done deal.”

“There seems to be no stopping Canada of late,” DePratto said. “The solid monthly data for June suggests that Canada still had solid momentum heading into the summer months, with very early tracking suggesting that Q3 growth could be around 2.5 per cent – a solid pace by any measure and one likely to push Canada into excess demand territory.”

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