The Bank of Canada’s decision to raise interest rates twice this year and the reminder by Governor Stephen Poloz last week that “the economy will need less monetary stimulus over time” have resulted in a further increase in rate expectations over the next 12 months. As things stand, the market implied probabilities suggest that there is a 33% chance of another interest rate hike to 1.25%, from 1.00%, at the mid-January policy meeting. Our view is that the Bank will keep rates on hold. The bigger question is where will rates be in 12 months’ time? In contrast to the consensus, our view is that the housing slowdown will have more significant consequences for economic growth throughout next year, eventually prompting the Bank to reverse course and lower rates to 0.50%.
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