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How Canada could end up with the G10’s highest interest rates

How Canada could end up with the G10's highest interest rates

Briefing highlights

  • Canada could end 2018 with highest G10 rates
  • Markets at a glance
  • What the census numbers show
  • Canadian home prices rise …
  • but hold that thought, Toronto
  • JPMorgan’s Dimon slams bitcoin


The Bank of Canada has gone from dove to hawk in the time it takes for a loon to get airborne.

So much so that JPMorgan Chase believes it could close out 2018 with the highest benchmark interest rate among G10 countries and beyond.

Economists have different projections, of course, and they don't necessarily see the Bank of Canada's overnight rate as world-beating.

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But nor are they far off JPMorgan's call, some with a difference of just one-quarter of a percentage point.

"In the medium term our economists are forecasting ongoing quarterly hikes for the duration of the forecast period … which if realized would have delivered a cumulative 175 basis points, and would put Canada's benchmark rate at 2.25 per cent by end-2018, above all other G10 central banks and at or above nine [emerging market] central banks, according to our economists' forecasts," JPMorgan's Daniel Hui said in a report.

Carolyn Wilkins, senior deputy governor and Stephen Poloz, Governor of the Bank of Canada.

Governor Stephen Poloz and his Bank of Canada colleagues, having cut their key rate during the oil shock, have now moved twice, in July and last week, to bring it back to 1 per cent.

Analysts are now raising the possibility of a third hike at the next meeting in October, while others, such as those at JPMorgan, see the central bank moving again in December.

And, it's worth noting, 2.25 per cent isn't particularly high.

JPMorgan now sees the Bank of Canada following that year-end hike with quarter-point increases in each of next March, June, September and December.

The Wall Street bank's forecast would suggest that the Federal Reserve, which has also raised its key rate, doesn't pass the 2-per-cent mark by the end of 2018.

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Although close, not everyone sees it that way.

Bank of Nova Scotia, for example, sees the Bank of Canada's benchmark ending 2018 at 1.75 per cent, compared with the Fed's upper end of its range at 2 per cent.

Royal Bank of Canada, in turn, sees the Bank of Canada at 2 per cent and the Fed's upper end at 2.5 per cent.

Whether forecasts differ by a quarter of a percentage point on this central bank or the other, the bottom line is that Canada's has moved markedly in tone and action.

"The bank's dramatic and progressive shift in tone from dovish at the start of the year, to neutral, to hawkish, to the most-aggressive-hiker-in-the-world has profound implications," said Bank of Montreal chief economist Douglas Porter, noting how the Canadian dollar has spiked.

"Bond yields have powered higher across the curve, all the more notable given the ongoing pullback in U.S. Treasury yields," Mr. Porter added.

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Others, such as the European Central Bank, Bank of England, Swiss National Bank and Bank of Japan, by the way, are nowhere in sight. They truly have miles to go before they wake.

As for the next move coming in October or December, chief economist David Rosenberg of Gluskin Sheff and Associates said it wouldn't be the first time that the Bank of Canada has gone three times in a row.

It happened in 2010, 2005, 2002 and 1999.

(Mr. Rosenberg titled his report "Those Crazy Canucks!" And, yes, someone has already referred to the possibility of a rate-hike hat trick.)

Several things have to happen for an October move, said economist Dana M. Peterson of Citigroup, who is reassessing her forecasts:

1: Tracking of third-quarter economic growth tops the Bank of Canada's expectation of 3 per cent, annualized.

2: So-called core inflation, which strips out volatile prices, continues to pick up.

3: The Fed's plans to "unwind" its balance sheet doesn't upset markets.

4: Geopolitics and U.S. politics don't upset markets.

5: The easing of Toronto's bubbly housing market "continues to proceed in an undisruptive fashion."

6: Renegotiation of the North American free-trade agreement goes smoothly.

7: The rise of the loonie doesn't get out of hand, and that its gains are because of "domestic strength rather than trouble abroad."

"In our view, the BoC is likely to raise rates to a range of 2.5 to 3 per cent sooner than we forecasted, but the pace will be calibrated by the decibel level of consumer complaints about debt financing costs," Ms. Peterson said.

"The pace of Fed tightening will also factor into this calculus given its influence on global bond yields. The bank currently seems little perturbed by the bevy of downside risks to the policy path stemming from its southern neighbour's trade, tax, and fiscal policies."

Read more

It looks like the latest bounce in the greenback is over and done with

IG chief market analyst Chris Beauchamp

Markets at a glance

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Incomes rise

Most Canadians saw their incomes climb over the past decade as the resource sector boomed, according to fresh census numbers from Statistics Canada.

Read more

Home prices rise

Hold that thought, Toronto.

Canadian home prices edged up 0.6 per cent in August from July, and 13.1 per cent from a year earlier, according to a fresh reading.

That monthly gain, by the way, is below the August average over the 19-year history of the Teranet-National Bank home price index.

Notably, too, Toronto prices fell for the first time since January, 2016, its 0.4-per-cent monthly decline pulling down the entire index.

"That being said, Toronto active-listings-to-sales ratio, an indicator of market conditions, turned from being very tight early in the year to indicating a balanced market in August," said National Bank's Marc Pinsonneault.

"This should limit the potential for further price correction," he added.

"Yet more price declines cannot be ruled out given the expected tightening of qualification rules for uninsured mortgages and interest rate increases."

On a monthly basis, prices in Vancouver rose 2.4 per cent, Victoria, 1.8 per cent, Ottawa-Gatineau, 1.4 per cent, Winnipeg, 1.3 per cent, Edmonton, 0.8 per cent, Hamilton, 0.6 per cent, Halifax 0.3 per cent, and Calgary, 0.1 per cent.

Prices fell 0.1 per cent in Montreal, and 0.6 per cent in Quebec City.

On an annual basis, Toronto prices rose 23.9 per cent, Hamilton, 23.4 per cent, Victoria, 16 per cent, Vancouver, 9.3 per cent, Ottawa-Gatineau, 4.2 per cent, Montreal, 4 per cent, Quebec City, 2.7 per cent, Calgary, 1.8 per cent, Winnipeg, 1.6 per cent, Edmonton, 0.9 per cent, and Halifax, 0.7 per cent.

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