Bank of Canada - 25bps rate hike likely, but Nafta remains a risk - ING

ING Analysts believe the Bank of Canada is set to hike rates by 25 basis points this week but could remain cautious in their assessment of the economic outlook.

Key points

We are seeing a recovery in wage growth and with oil prices close to $70/blue this is adding to nervousness that inflation pressures are building at a time when the economy is performing strongly. With financial markets pricing in an 80% chance of a hike and 23 out of 26 economists surveyed by Bloomberg also looking for an increase, it would be a major surprise for the Bank of Canada not to deliver.

However, concerns over the future of the NAFTA free trade agreement lead us to believe that the BoC will be somewhat cautious in their assessment for the economic outlook.

With President Trump having threatened to rip up the longstanding trade deal and Mexican and Canadian officials sounding cautious on the prospect for compromise ahead of the sixth and penultimate round of talks, we expect little guidance from the BoC on future moves.

After all, exports to the US account for 17% of Canada’s GDP so officials will be nervously waiting to see what happens. We still think there is scope for compromise on the future of NAFTA, but this is by no means the universal view. As such, we are currently only pencilling in one further rate rise this year.