The Bank of Canada is set to hike rates this week and will be holding its first monetary policy meeting of the year. According to many, the BoC is expected to hike interest rates by 25 basis points at this week’s meeting.
The rate hike comes just after December’s BoC meeting, which saw the central bank taking a cautious stand as it left interest rates unchanged at one percent. The rate hike view is supported by the strong economic data since early December, just around the time that the BoC concluded its December meeting.
Canada’s unemployment rate falls to a 40-year low
In November, Canada’s unemployment rate fell to the lowest rate in nearly 40 years. The jobless rate plunged to 5.7% in December according to Statistics Canada. The economy added 78,600 jobs during the month, bringing the yearly employment gains to 422,500.
Both the unemployment rate as well as the job gains beat all economists’ forecasts by a strong margin.
This was also a record as it was the best annual gain in jobs since 2002. The Canadian economy remained resilient as the unemployment report showed a rapidly falling slack in the economy. This is expected to squeeze wages further and could eventually see consumer prices rising.
Following the jobs data, the Canadian dollar as well as bonds soared as the markets began to quickly price in the rate hike at the January monetary policy meeting.
The sudden turnaround in the economy caught policy makers by surprise. The Canadian dollar was one of the top performing currency pairs last year. However, the strong appreciation in the exchange rate, briefly put a dent on exports.
Earlier last week, trade data from Canada showed that the nation’s trade deficit increased significantly on surging imports. Trade deficit widened at the fastest pace in nearly eight years.
Exports were also classified as robust as they increased for a second consecutive month. The merchandise trade deficit for November widened to a seasonally adjusted 2.54 billion CAD, with October’s trade deficit revised to 1.55 billion CAD.
Imports surged by 5.8% marking the biggest monthly gain since July 2007. Exports advanced 3.7% marking a second consecutive month of increase after exports declined for four consecutive months previously.
BoC Business Outlook Survey
The Bank of Canada released its business outlook survey for the fourth quarter of 2017 last week. The report was expected to potentially cement expectations in favor of a rate hike.
The report showed that business sentiment was high with businesses running at full capacity, which marked a new record since 2007. The outlook survey showed that over 56% of participants said that they might some or significant difficulty in meeting the anticipated demand.
This was an optimistic view, considering that the percentage of respondents had gone up from 47% in the previous quarter. This was the highest level recorded since the fourth quarter of 2007.
According to the survey, companies reportedly increased hiring as well as capital investment to address the tight capacity. Demand is also expected to grow at a moderate pace over the next 12 months. The BoC’s business outlook survey covers over 100 firms and the survey was conducted during the periods of November 14 – December 8.
Overall, the BoC’s business outlook survey points to the strong case that the Bank of Canada could hike interest rates by another quarter percentage point, bringing the interest rates to 1.25% this week.
The outlook survey was robust enough to make many economists who were still doubtful for a rate hike to shift their views.