With the Bank of Canada on a communications hiatus this month, two economists have read the tea leaves in governor Tiff Macklem’s comments at the July interest rate hike to decipher the bank’s next move — and arrived at diverging conclusions.

Bay Street number crunchers Stephen Brown and Derek Holt in recent notes both cited Macklem’s July 12 statement that the bank would  “be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with achieving the two per cent inflation target.”

Based on those metrics, Brown at Capital Economics said the bank “can afford to wait” at its upcoming Sept. 6 decision. Scotiabank’s Holt, on the other hand, said the bank should hike again “until you have clarity that the inflation risk has been reduced.”

The Bank of Canada’s benchmark interest rate now stands at a 22-year high of five per cent as the battle against inflation continues. Markets are predicting a 25 per cent chance of a hike in September and a 60 per cent chance of an increase by the end of the year, according to data from Bloomberg.

Both economists tapped the data to guide their positions.

Brown, Capital Economics’ deputy chief economist for North America, said the Bank of Canada will have to wait until the release of its October consumer and business surveys to figure out where inflation expectations are headed. Fresh insight on corporate pricing also won’t be available until then, though he noted a recent paper from the bank’s research department argued that a rise in mark-ups resulted from a collapse in costs and that, more recently, margins have been falling.

On wages, Brown said there are signs the labour market is loosening as the unemployment rate rises and jobs listings fall. The jobless rate in Canada is now 5.5 per cent, up from a multi-decades low of 4.9 per cent in June 2022.

Further, the economist doesn’t think the economy is in excess demand, which can heat inflation, arguing demand was mostly the result of “ongoing post-pandemic recoveries” and that interest-rate sensitive sectors such as housing are already slumping.

Earlier this month, the consumer price index (CPI) delivered an “unwelcome surprise” rising to 3.3 per cent in July from 2.8 per cent the month before.

Brown expects inflation to creep up again in August to 3.8 per cent on fuel costs and average 3.6 per cent for the quarter.

Despite this, he said the increase in inflation is partly due to rate hikes that pushed up the cost of mortgages. Removing the costs of rising interest would mean that inflation came in at 2.2 per cent in July.

“If Canada used the same definition of core inflation as elsewhere – excluding mortgage costs, food and energy – the bank might already be popping the champagne as inflation by that measure fell to exactly two per cent last month,” Brown wrote in his note.

However, Holt at Scotiabank isn’t quite ready to sip some bubbly.

He said core inflation, which excludes mortgage interest costs is “still hot” coming in at 4.25 per cent annualized for the Bank of Canada’s preferred measures.

Wages are still being pushed up, most notably by collective bargaining by unions and Holt said more pay pressures loom in the automotive and education sectors where negotiations for new contracts are underway.

Holt, unlike Brown, relied on inflation expectations from the bank’s surveys released in July that showed consumers and businesses expect inflation to exceed the bank’s target range over the next two years.

“There is substantial risk that the BoC hikes again on Sept. 6 and a slight bias toward a hold may be further informed by GDP figures,” Holt said.

Statistics Canada releases GDP for the second quarter on Sept. 1.

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Canada’s big banks reported third-quarter earnings this week and revealed a sizable increase in provisions for loan losses from the same time last year, taking a bite out of profits.

TD, National Bank of Canada, Scotiabank and BMO all missed analysts estimates with loan loss provisions nearly doubling in some instances as banks brace for a possible economic slowdown and grapple with the possibility that homeowners who must renew mortgages next year and in 2025 will struggle to pay higher interest rates.

Royal Bank of Canada was a bit of an outlier. Despite also setting aside more money for bad loans, RBC nonetheless beat analyst estimates due to lower taxes and growth in loans, deposits and credit card balances.

Canadian Imperial Bank of Commerce was scheduled to report earnings on Aug. 31.

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Today’s Posthaste was written by Gigi Suhanic, (@gsuhanic), with additional reporting from The Canadian Press and Bloomberg.

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