Good morning,

There’s a lot of suspense building around the Bank of Canada’s meeting this week.

But, whether it pulls the trigger Wednesday or waits until July, there is growing speculation among economists and the market that interest rates are going higher. 

The Bank of Canada announced a pause on its rate-hiking cycle early this year after raising rates from near zero to 4.5 per cent so it could assess the impact on the economy.

Rate hikes are designed to act like a brake on the economy with the aim of lowering inflation, but so far our economy has shown surprising resilience.

Gross domestic product in the first quarter rose to 3.1 per cent annualized, beating the Bank of Canada’s forecast of 2.3 per cent. An early estimate of a 0.2 per cent rise month over month in April suggests growth could also exceed the Bank’s expectations for this quarter as well.

April’s inflation numbers also took economists by surprise, ticking up to 4.4 per cent from a year ago, instead of the forecasted 4.1 per cent, in the first acceleration since June 2022.

And Canada’s housing market is heating up again, with the average home price jumping 4.3 per cent in April, up nearly 17 per cent since January.

Rising home prices are especially tricky because Bank of Canada research shows that consumers’ inflation expectations are heavily influenced by the housing market, said Capital Economics.

The stage appears set for more rate hikes, but how many and when is the question.

A number of economists think the Bank will keep its powder dry this week and then possibly hike in July, including the market where expectations of a rate hike June 7 were just 38 per cent last week.

Desjardins chief economist Jimmy Jean says banking turmoil in the United States has tightened credit across North America and this alone could have an impact equivalent to another rate hike, possibly more.

If the Bank surprises by hiking this week, it could spark speculation of even more hikes, tightening financial conditions to a level that the Bank may not be comfortable with, he said.

Lastly, even though the U.S. debt ceiling standoff has been resolved, the issuance of Treasury bills and notes from a cash-strapped U.S. Treasury could impact Canadian funding markets.

“As a result, what we envision for [Wednesday] is a Bank of Canada revving the hike engine without putting it in gear just yet,” wrote Jean in a note.

There is also more data to come.

“The Bank of Canada is in the uncomfortable position of having to make a rate announcement [Wednesday], and then see the May jobs data on Friday,” writes CIBC chief economist Avery Shenfeld.

“By using the June announcement to issue a stern warning that a rate hike could well be in the cards for July they can keep bond yields and mortgage rates elevated, while putting off the decision until they have that data,” he said in a note Friday.

Shenfeld said May’s job numbers will likely be elevated because Statistics Canada will be phasing in population growth that took place months ago. So the number to watch on Friday is the unemployment rate.

“If it doesn’t start ticking higher, the wheels will be in motion for a July rate hike,” he said.

Others are more hawkish.

Stephen Brown, Capital Economics’ deputy chief North America economist, says the market is underestimating the extent to which the Bank will raise rates and is forecasting a hike this Wednesday and possibly again in July.

“If the Bank hikes by 25 bp [Wednesday], to 4.75 per cent, and offers a hawkish statement we assume the Bank will follow with another 25bp hike in July, although we’ll wait for the meeting … before making that call official,” he wrote.

One last reason the Bank might stay put Wednesday is there is no press conference. “One would assume that a resumption of tightening would warrant having the BoC’s top dog(s) deliver the news, smoothing over any interpretational issues, should they arise,” wrote National Bank economists on Friday.

Still, Canada’s central bank has not shied away from surprises in the past.

“Investors beware, this is very much a ‘live’ meeting,” they added.

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Toronto home prices rose for the third month in a row in May, showing clearly that the Bank of Canada’s decision to pause interest rate hikes has had an effect on the housing market. The benchmarked price of a home in Canada’s largest city rose 3.2 per cent to $1.14 million, the biggest increase since the market peaked in February 2022, Bloomberg reports.

Today’s chart shows how home sales in Toronto have climbed since the Bank of Canada announced its conditional pause on rate hikes in January. Prices have climbed as well as more buyers returned to the market than sellers. The benchmark prices for a home in Toronto is up 6.8 per cent since February.

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Creating extra contribution room in your registered retirement savings plan seems like a good idea, but certified financial planner Allan Norman says how to use it depends on the answers to many questions. Are you trying to create the biggest estate? The least amount of tax? Or the most you can spend? Get the answer

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Today’s Posthaste was written by Pamela Heaven, @pamheaven, with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.

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