Photographer: Brent Lewin/Bloomberg

Four Missing Pieces in the Puzzle of Poloz's Shift to Rate Hawk

  • BOC governor’s recovery talk opens door to July 12 rate rise
  • Reports on business outlook, GDP and trade to fill in blanks

The door to higher interest rates in Canada is suddenly wide open.

Bank of Canada Governor Stephen Poloz reiterated this week he’s considering raising rates as the economy heats up and spare capacity disappears. It was the latest in a barrage of statements from Poloz and his deputies that suggest the central bank is firmly in the tightening camp, even with oil prices below $50 a barrel and inflation falling further below its 2 percent target.

Investors are certainly buying in, now assigning a 75 percent chance of a rate increase at the July 12 meeting. Two of Canada’s largest lenders -- Bank of Montreal and Bank of Nova Scotia -- are both now predicting hikes next month.

It’s a big shift for the central bank, which just a few months ago was talking about cutting rates rather than raising them. Here are four pieces of data that may provide some insight into Poloz’s shift to rate hawk.

Business Outlook Survey

The Bank of Canada releases its Business Outlook Survey at 10:30 a.m. Friday, and it’s the one big piece of data Poloz has to himself, prompting economists to suggest it may be what’s behind the Governor’s change of tone.

The quarterly report is based on talks with about 100 business leaders and breaks out readings on sales, investment, hiring and inflation expectations. In its last report released April 3, the Ottawa-based central bank found business sentiment continued to show signs of recovery, with executives more optimistic about investment than at any time since 2010. At the same time, 64 percent of those polled saw inflation running between 1 percent and 2 percent, below the bank’s 2 percent goal.

Erik Hertzberg/Bloomberg

The report “will be important in assessing the degree of comfort the BoC has in what looks like a program over the medium-term to remove the 50 basis points of oil price plunge-related cuts in 2015,” Mark Chandler, head of fixed income research at RBC Capital Markets, said in a note to investors June 28.

Gross Domestic Product

Two hours before the business survey (and the day before Canada’s 150th anniversary celebrations kick off in Ottawa) Statistics Canada is due to report GDP for April, a benchmark of how much momentum is carrying into the second quarter. Economists predict a gain of 0.2 percent on the month, while the anticipated gain of 3.4 percent over the last 12 months would be the fastest since June 2014. That’s a significant mark because it was before the full crash in oil prices and suggests a return to normal conditions.

Erik Hertzberg/Bloomberg

Trade Balance

Canada’s trade with the world is showing signs of adding to growth after the deficit hit a monthly record in September. The report for May due on July 6 follows April figures showing the volume of exports up 1.1 percent while imports fell 0.3 percent. Over the last year, exports climbed 14.7 percent in April, almost double the 7.4 percent gain in imports.

Job creation

Debt-fueled consumer spending has powered Canada’s economy through the oil crash. One thing that can give Poloz confidence about raising rates without rattling Toronto’s hot housing market is more evidence that the labor market is solid, giving people the paychecks to keep going. The June report published next Friday would have to be a massive disappointment to suggest the economy needs more time to heal. Wages are picking up, and job gains over the last 12 months were the fastest since 2013.

Erik Hertzberg/Bloomberg

— With assistance by Erik Hertzberg

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