The Bank of Canada is widely expected on Wednesday to raise its benchmark policy rate for the first time in seven years, signaling the Canadian economy is on the path to recovery after years of tepid growth following the global slump in commodities.
Canada's central bank, led by Gov. Stephen Poloz, is joining peers at the Federal Reserve, the Bank of England and the European Central Bank as they dial back on the extraordinary run of ultralow interest rates aimed at jump-starting the global economy in the aftermath of the recession of 2008-09.
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In Canada, which was hit with an income shock after the downturn in prices of oil and other commodities, low rates have resulted in an extended period of loose money that has fueled a housing boom in pockets of the country. Some analysts say soaring real-estate prices, which have stretched affordability and forced official measures to curb investing, could be a factor driving Wednesday's expected increase.
Canadian housing starts rose 9.1% to a seasonally adjusted annual rate of 212,695 units in June, Canada Mortgage and Housing Corp. said on Tuesday.
Amid recent growth in gross domestic product and robust job creation, Mr. Poloz has signaled he will remove stimulus this week, monetary-policy analysts said. That is even though inflation -- at an annualized 1.3% rate in May -- remains well below the central bank's 2% target, and wage growth remains stubbornly low.
Nine of the 10 primary dealers of Canadian government securities dealers surveyed by The Wall Street Journal predicted a Bank of Canada rate rise on Wednesday, from its near-record low of 0.5% to 0.75%. One firm, TD Securities, said it believed the central bank would hold off until October, arguing a rate rise now could hurt the Bank of Canada's reputation as an inflation-targeting bank.
The majority who expect a rate increase mostly cite two factors: a marked bullish shift in central bank communications about the outlook; and data signaling Canadian output is expanding at its fastest pace in nearly three years, or since the onset of the commodity-price downturn.
Six of the dealers surveyed added they expect Canada's benchmark interest rate to hit 1% by the fall.
"Inflation isn't pressing, but the economy is showing that it can easily live with interest rates a bit higher than they are at present and still generate solid growth," said Avery Shenfeld, chief economist at CIBC World Markets.
Traders are also banking on a rate rise, and have priced a roughly 90% possibility of an increase on Wednesday based on the overnight index-swap market. The Canadian dollar has surged to a 10-month high in recent days, while Canadian government bonds have sold off aggressively alongside their global peers.
Much has changed about Canadian rate expectations in just a matter of weeks. In the last Journal survey before the Bank of Canada's May 24 rate decision, no economist envisaged a rate rise before the end of 2017. This was based on the cautious tone Mr. Poloz had embraced, which opted to emphasize downside risks over encouraging data, especially on the hiring front.
Forecasts changed starkly following a June 12 speech from the Bank of Canada's second-highest-ranking official, Carolyn Wilkins. She said economic activity was broadening on a regional and industrial sector, and that required central bank officials to assess whether ultralow rates were still necessary.
And in two broadcast interviews in June, Mr. Poloz said rate cuts delivered in 2015 have worked in helping the economy adjust to the income shock from lower energy prices, and that spare labor and production capacity in the economy was being "steadily" absorbed. Those factors needed to be taken into account when officials gathered to make their Wednesday rate call, he said.
Mr. Shenfeld said one factor that may be driving the Bank of Canada is more concern about financial stability than it is letting on, highlighted by record levels of household debt and worries about a housing crash in Toronto and Vancouver.
"Why encourage excesses of debt?" he said. "We'll trade off a bit of a delay in getting to 2% inflation if that gives sufficient benefits in financial stability."
Frances Donald, economist at Manulife Asset Management, said the central bank will likely frame a rate rise as the removal of "insurance" it took out in 2015 with two rate cuts after business investment plunged. She said there remains a chance Mr. Poloz opts to keep the policy rate as is on Wednesday, given weak inflation and wage gains, and uncertainty that remains over the Trump administration's trade policy.
But given the central bank's message in recent weeks, "failure to hike at this juncture would probably lead to more confusion about the effectiveness of the central bank's communication policies and its decision-making framework," she said.
--David George-Cosh contributed to this article.
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(END) Dow Jones Newswires
July 11, 2017 12:15 ET (16:15 GMT)