Central Banks

Bank of America / Merrill Lynch expect the BOC to hike rates at the monetary policy meeting today

But first, check this out – Adam posted his preview earlier:

This now via BoA/ML(bolding mine)

  • We expect the BoC to hike 25bp on 17 January with a statement that highlights the strength of the labor market.
  • We continue to expect a total of three 25bp hikes in 2018 given the strength of the labor market and the Fed’s hiking cycle
  • We see room for breakevens to rise and for 2y-10y and 5y-30y curves to moderately steepen.
  • We see upside risks to USDCAD.

More detail:

At least three hikes in 2018

We expect the Bank of Canada (BoC) to hike 25bp on 17 January to put the overnight rate target at 1.25%.

  • In our view several conditions have been met for the BoC to continue withdrawing monetary stimulus: GDP growth above potential, the unemployment rate at its lowest level in decades. core inflation rising and the Fed hiking.

We also expect the BoC to hike at least two more times in 2018 to put the overnight rate target at 1.75% by year end (next hikes in April and July).

  • With the Canadian business cycle in sync with the US. we believe it will be hard for the BoC to look through Fed hikes.
  • Our US economists expect three Fed hikes in 2018. with risks skewed toward achieving four hikes.

The BoC needs to remain vigilant about several downside risks. but in our view those risks should not prevent the BoC from hiking. NAFTA uncertainty should not have an impact on monetary policy unless the risk of a breakdown materializes.

  • Highly indebted households are a reason to pace the timing of the hikes, but not a reason to remain on hold, in our view.
  • And we think low Western Canada Select (WCS) prices should only impact monetary policy if they remain with a large differential with respect to WTI for a long time.
  • On the other hand, we believe the risk of being behind the curve in terms of inflation or financial instability is high if the BoC keeps postponing the next hike.

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