Bank of Canada will keep hiking in 2019 – ING

James Smith, Developed Markets Economist at ING, expects BoC to take a pause in December, but decent growth, low employment and easing inflation should keep policymakers on track for two - if not three - rate hikes next year

Key Quotes

“We may see a slightly slower pace of growth in 2019 (our forecasts look for 2.1%), reflecting a more moderate expansion in the US. This is unlikely to faze many Bank of Canada (BoC) policymakers, although trade tensions remain a clear growth risk in 2019.”

“A lot depends on what happens to the United-States-Mexico-Canada-Agreement (USMCA) as there are a few key hurdles to overcome - principally whether it will be ratified by (the now split) Congress.”

“Wage growth has been particularly disappointing over recent months, falling from 3.93% in May to 1.87% in October - for permanent workers. Importantly though, there are signs that this could begin to improve again in 2019. At the same time, consumer confidence is in good shape and should support spending in the near-term.”

“Inflation is expected to ease towards the Bank's 2% inflation target next year. We expect headline CPI to inch down to 2.1% in 2019, from 2.3% this year. But what really matters for the central bank is core inflation, which is likely to remain supported by the solid growth and the wage outlook.” 

“Putting all the pieces together, we expect two rate hikes in 1Q19 and 3Q19, taking the policy rate towards the lower end of the BoC's estimate of the nominal neutral rate (2.5%-3.5%, based on at-target inflation).”