Indirect Evidence That Rate Hike is Imminent

Today, the Bank of Canada released the results of a survey it conducted regarding the short-term outlooks of Canadian businesses. Of particular importance to those interested in predicting the future of mortgage rates were the responses to two questions, one regarding job creation and one regarding inflation outlooks.
Among Canadian firms surveyed, 57% expected to increase employment over the next year. In April, only 50% expected to increase employment. This increase in optimism suggests that, broadly, economic growth should speed up over the coming year. An improving economy decreases the need for the Bank of Canada to continue its current growth-inducing monetary policy of super-low interest rates.
Of similar importance were the responses to a question regarding inflation outlook. 80% of companies surveyed expect to see inflation at a level above 2% over the next year. April’s survey reported that 70% of firms held that expectation. These results point to an increasing expectation that inflation will be above the optimal level over the next year, which would increase the desire on the part of the Bank of Canada to increase interest rates in order to slow inflation.
What is important is that the outlook includes both optimism for growth as well as an anticipation of inflation. Recently, the Bank of Canada has avoided hiking rates because only one of these conditions were present. When weak growth is coupled with only slightly above optimal inflation rates, as we have seen in the near past, the central bank is much less interested in curbing inflation as hikes are typically damaging to growth. With growth expected to increase and inflation expected to be at above optimal levels, expect to soon see Canadian mortgage rates begin their climb up.