Suprise rate hike. More to come?

Predictions of a resumption of interest rate increases by the Bank of Canada have come true … except it happened a month earlier than most forecasters expected.  It was a surprise move that now has the experts speculating about another hike in July.

At its June setting, last week, the BoC bumped up its trendsetting overnight rate by another 25 basis-points to 4.75%, its highest level in 22 years.  The Bank pointed to persistent inflation pressures which saw the inflation rate climb by a tenth-of-a-point to 4.4% in April, a resilient economy that posted first-quarter growth of 3.1%, and a labour market that remains strong.

On Friday, though, a small crack appeared in that solid job market.  The unemployment rate rose for the first time in nine months.  It now stands at 5.2%.  That is up from 5.0%, where it has been since the start of the year.

Labour market statistics can be notoriously volatile, so one month does not signal a trend.  But the analysts do see some deeper signs of softening with weakness in total employment and a monthly decline in hours worked.

Whether that will be enough to stave off another rate increase on July 12 remains to be seen.  But the Bank will have more information to work with by then: inflation numbers for May and the June employment report will both be out.

For now, the market watchers seem to be favouring another quarter-point increase that would move the Bank of Canada rate to 5.0%.