Canada on a charge - ING

"The positive data surprises just keep coming from Canada, likely prompting another interest rate hike this week," ING economists argue.

Key quotes

Growth expectations were revised up across the globe in 2017, but Canada was one of the star performers. Only the Netherlands and Spain are likely to have outpaced Canada’s 3% GDP growth amongst developed market economies. The speed of the turn-around in Canada also caught the Bank of Canada by surprise. Having suggested little prospect of any rate hikes early in the summer, they actually hiked rates at both the July and September policy meetings.

It now suddenly looks as though the Bank of Canada will raise rates again this week, rather than wait until March. The big catalyst for the change in market expectations has been the strength in the December jobs report, released January 5. Canada saw nearly 80,000 jobs created in November. Expectations had been for a correction in December but instead, we got another 79,000 jobs. To put this in context, job creation had averaged just 26,000 in the first ten months of the year. As such, the Canadian unemployment rate has dropped from 6.9% at the end of 2016 to just 5.7% - the lowest rate since comparable records began back in 1976.

However, concerns over the future of the NAFTA free trade agreement lead us to believe that the BoC will be somewhat cautious in their assessment for the economic outlook. With President Trump having threatened to rip up the longstanding trade deal and Mexican and Canadian officials sounding cautious on the prospect for compromise ahead of the sixth and penultimate round of talks, we expect little guidance from the BoC on future moves. After all, exports to the US account for 17% of Canada’s GDP so officials will be nervously waiting to see what happens. We still think there is scope for compromise on the future of NAFTA, but this is by no means the universal view. As such, we are currently only pencilling in one further rate rise this year.