BMO Capital Markets recently made some interesting observations about the Bank of Canada’s rate hike tendencies.
See: Bank of Canada Tightening Cycles
Despite a limited sample size, BMO listed the following common traits from prior rate increase cycles:
- Bank of Canada (BoC) rate hikes come in “clusters, moving across a minimum of two consecutive announcement dates. (If this holds true, the BoC will raise rates again on July 20.)
- 84% of the past 25 rate increases have been 25 basis points
- The BoC has often paused its rate hikes during past tightening cycles–sometimes more than once in a given cycle
- The BoC has shown it will tighten even with core CPI inflation below its 2% target (That’s largely because the BoC tries to anticipate inflation and because it takes roughly a year or more for rate hikes to work through the economy.)
- Rates rose an average of 200 basis points over 18 months in the past four cycles
(Chart via BMO Capital Markets, Author: Michael Gregory, CFA, Senior Economist)
BMO says the Bank of Canada typically sets policy after heavy consideration of five “C’s:”
- Core CPI (inflation)
- Canadian dollar
- Commodities
- Cross-border exports (to the U.S.)
- Crises (economic, financial, or geopolitical)
That last “C” happens to be a factor today, courtesy of the European debt crisis. Nonetheless, BMO says: “We judge the Bank’s scale will eventually tip to the domestic data side, and the new tightening cycle will toe the stylized line.”
In other words, BMO expects concerns about European debt to fade at some point, with the BoC continuing its path to more normalized (higher) interest rates.
Last modified: April 26, 2014
Thanks for the interesting article. This provides more insight than I had previously about how the BoC analyzes “current environment”
Thanks Mortgage Trends!
“expects concerns about European debt to fade at some point”
Yeah, at some point could be in 3 years time! Its certainly not going away any time soon. This could make the US sub prime mess of a couple of years ago seem trivial by comparison!
I would be very surprised to see more than 1 more hike out of the Bank of Canada before they realise that Canada is never able to stand on its own when the rest of the world is going into the toilet.
Or it could be 3 weeks.
Comparing Europe’s woes to the subprime calamity is not a fair comparison. I would instead side with Carney’s opinion:
http://www.cbc.ca/canada/montreal/story/2010/06/07/mtl-carney-european-debt-montreal-conference.html
I thought it was interesting that Brian Bethune, chief economist with IHS Global Insight in Canada, was critical of the Bank of Canada raising interest rates on June 1st, given the uncertainty of the economist recovery in Europe: http://ca.news.finance.yahoo.com/s/14062010/2/biz-finance-signs-recovery-stalling-present-g20-quandary-pull.html. Nonetheless, I really believe that while the slowing economy will affect all of us, Vancouver and Canada mortgage rates are on their way up.