By Ketki Saxena
Investing.com -- The Bank of Canada (BoC) caught the market off guard with a rate hike last week, yet BMO (TSX:BMO) believes it won't be the last one. With the Canadian economy performing exceptionally well, and the housing market still hot, at least one more rate hike is anticipated.
Last week in a surprise move, The BoC raised the overnight rate by 25 basis points to 4.75%, its highest level since 2001 when rates were being reduced in response to the tech bubble burst. Now, analysts at BMO expects rates to go even higher.
Benjamin Reitzes, Canadian Rates & Macro Strategist notes, "Another 25 bp hike in July appears likely in our view given the BoC’s hawkish tone and limited data points until that meeting."
"The market agrees with our view and is pricing another 35-40 bps in tightening by year-end," Reitzes stated.
The better-than-expected performance of Canada's economy is part of the reason for increased expectations for further rises in overnight rates.
While these rising rates were supposed to suppress demand for goods and services, there have been minimal indications that they're cooling down economic growth thus far. Core inflation remains high, employment is close to a record level, and GDP growth rivals some of the best periods in history. It appears that the rising overnight rate has had little effect on Canada's overall economic performance,.
A still overheated housing market is another key factor driving expectations for another BoC rate hike.
"With 5-year yields also popping about 20 bps higher, mortgage rates could soon climb as well. That would dampen building momentum in housing, something the BoC probably won’t mind seeing", Reitzes noted.