Expectations of a rate hike have seesawed from a near certainty to a coin toss and back to a sound bet. Markets are currently 92% priced in for a 0.25% increase to the Bank’s overnight target rate, which would bring it to 1.50%.

But there are arguments to be made both for and against a rate hike at this time. Here are two sides of the debate as featured in two recent articles:

The Case for a Rate Hike

A column in the Financial Post took the position that the Bank of Canada has a window of opportunity to move rates higher, which is in tune with Governor Stephen Poloz’s stated outlook for higher borrowing costs.

Despite employment plateauing and unemployment rising slightly to 6%, the author argues the economy is still stronger than it was in 2017 and unemployment is at a near 50-year low.

On the uncertainty thrown into the mix with escalating trade wars and difficult NAFTA renegotiations, the author wrote: “To be sure, Trump is less of a theoretical threat today than he was a year ago. But it’s also time to acknowledge that monetary policy can’t do everything…The central bank’s main job is to control inflation, which is currently on target. Its other main job is to oversee financial stability, which should be a worry after about a decade of ultra-low borrowing costs.”

The Case Against a Rate Hike

One of the biggest arguments against a rate hike now is the uncertainty posed by Canada’s trade war with the U.S., as outlined in this Globe and Mail column.

“Key will be whether the Trump administration follows through with its threat to punish auto imports, which would hit Canada, and Ontario in particular, hard, possibly driving the country into a recession,” the column notes. “Thus, the Bank of Canada could find itself in the position of having to cut rates down the road.”

The author also acknowledges the generally solid but “hardly exceptional” recent economic data and points to the improving but “still troubling” household debt situation.

The author notes the economy is still adjusting to the previous rounds of rate hikes, as well as the new mortgage qualification rules that took effect earlier this year, and quotes Paul Matsiras of Moody’s Analytics who thinks rates will actually be left unchanged this week.

“…it is still too early to judge the economy’s sensitivity to higher interest rates given the accumulation of household debt,” Matsiras is quoted. “Until a clearer picture emerges, the bank will remain cautious.”

By: Steve Huebl