The odds of the Bank of Canada raising rates at this week’s monetary policy meeting are essentially a coin toss, according to economists. While the decision could go either way, the markets indicate a slightly higher chance of the bank maintaining the status quo for another month. This is primarily to wait for the release of the May employment statistics, which will provide crucial data for the bank’s decision-making process.

June vs July Meeting: Potential for Rate Hike

If the Bank of Canada opts to hold rates this week, it increases the likelihood of a 25-basis-point rate hike (0.25%) at the bank’s next meeting on July 12. This decision will largely depend on the May employment statistics and their impact on the overall economic outlook. We will have to wait to see those numbers.

Economists from BMO and Desjardins emphasize the difficulty in predicting the Bank of Canada’s rate decision. Benjamin Reitzes of BMO describes it as a “close call,” with the choice between maintaining current rates or raising them hanging in the balance. Similarly, Desjardins economists view the decision as almost a coin flip at this point.

Scotiabank economists have been more bullish on rate increases for quite some time. They are currently telling us that more caution is required with regards to inflation management. “An additional 25 basis points move is required” they say when discussing the June 7th meeting.

Market Expectations and Probability

The Overnight Index Swap markets currently price in a 41% chance of a rate hike this week. However, the probability rises significantly to 78% for the Bank’s July meeting. This indicates that the market is leaning toward a rate hike in the near future, but not as sure about it being this week.

Rising House Prices: a Key Indicator

The Bank of Canada closely monitors rising house prices as a key indicator of the economy’s stability. BMO Chief Economist Doug Porter highlights the significance of the housing market’s ability to withstand previous rate increases and show signs of recovery. This raises the question of whether interest rates have reached a sufficiently high level. Porter expresses concern that both the Bank of Canada and the Federal Reserve might consider raising rates again in the future.

Differing Forecasts: Scotioabank Predicts Rate Hike

Among the economists from the major banks, only Scotia Economics forecasts a rate hike at the upcoming meeting. They expect that a rate hike would be accompanied by continued guidance that leaves room for further tightening. This is similar to previous messaging from Scotiabank. Scotia Economics believes that potential upside risks to the inflation outlook should be given greater consideration and suggests a more cautious approach to inflation management, calling for an additional 25-basis-point increase at this week’s meeting.

Views on GDP and Employment

BMO highlights the recent GDP growth, with Q1 growing at a rate of 3.1% annualized. The momentum appears to be continuing into Q2, as suggested by the flash estimate of +0.2% for April’s GDP. BMO notes that the Bank of Canada expects below-potential growth to curb inflation in the coming quarters, targeting a 2% inflation rate by the end of 2024.

Regarding employment, National Bank acknowledges the strong job creation in recent months but advises against an immediate resumption of interest rate hikes. They point out that the job growth is accompanied by significant population growth, and they believe that the aggressive rate hikes will continue to have an impact on the economy, albeit with some lag.

The Bank of Canada faces a challenging decision at its upcoming meeting, with economists and markets divided on the possibility of a rate hike. While the May employment statistics will play a crucial role in shaping the decision, factors such as rising house prices and overall economic indicators are also being closely monitored. The differing forecasts among economists reflect the uncertainty surrounding the Bank’s next move.