The prospect of a rise in interest rates by the Bank of Canada in July remains but recent data releases suggest Governor Poloz may not be in a hurry to act.

An assessment by TD Economics senior economist Brian DePratto points to some disappointing data releases from last week and the potential for more uneasy reading ahead.

Wholesale trade was flat in the second quarter of 2018 and retail figures declined by more than economists had expected.

Then there was inflation data which showed no change from a year ago at 2.2% in May, again not what the market was expecting.

These figures come ahead of the latest GDP data this week and BoC governor Stephen Poloz’s speech Wednesday which will focus on monetary policy and is expected to be widely studied.

There will also be reports this week on household credit data and the Business Outlook Survey; plus of course the potential for further trade tensions to add risk to the economy.

So, will the BoC increase rates?

“Unless these risks are sufficiently reduced or Canada’s economy accelerates markedly, we expect the Bank to move its policy rate by only 50bps (i.e. two hikes) per year,” writes DePratto in his ‘Weekly Bottom Line’. “As it stands, July remains most opportune time to hike, but with inflation remaining tame it is hard to expect much urgency.

OTTAWA _ A pair of unexpectedly soft economic reports are creating fresh doubts about the timing of the Bank of Canada’s next interest rate hike.

For months, experts have been predicting Bank of Canada governor Stephen Poloz to raise his benchmark rate at next month’s meeting. But broadening economic unknowns _ mostly linked to trade concerns around U.S. President Donald Trump’s protectionist agenda _ have begun to lead some analysts to wonder if Poloz will stand pat on July 11.

And on Friday two reports from Statistics Canada added more uncertainty to the interest rate outlook.

One release by the agency found Canada’s annual inflation rose at a pace of 2.2 per cent in May for the second straight month. The number, however, was cooler than market expectations of 2.6 per cent.

In the second report, Statistics Canada found that retail sales contracted in April by 1.2 per cent for the reading’s first month-to-month decline since December.

“These reports kind of highlight an economy that has slowed pretty significantly from the last year or two,” Robert Kavcic, senior economist for BMO Capital Markets, said in an interview.

“Given a lot of the uncertainty out there, and a little bit of a softer tone to this data, I think expectations for a July rate hike have probably come down a little bit.”

Royce Mendes of CIBC Capital Markets wrote in a report that Friday’s “bad data” make it even more difficult for the Bank of Canada to hike rates in July. Mendes noted, however, that things could improve before Poloz’s July 11 meeting because more important numbers on gross domestic product and employment are still on the way.

Nathan Janzen, RBC senior economist, said the combination of Friday’s figures, somewhat slower economic growth and a deteriorating tone in trade discussions with the U.S. “aren’t all that encouraging” and will make the Bank of Canada’s rate decision closer than previously thought.

Ranko Berich, head analyst at Monex Canada and Monex Europe, said the central bank’s July rate decision is “now an unknown factor.”

The hunt for clues into Poloz’s thinking will continue next Wednesday when he gives a speech to the chamber of commerce in Victoria, B.C.

The May annual inflation number in Friday’s report followed the 2.2 per cent reading for April and 2.3 per cent for March.

The main contributors to inflation last month were led by gasoline prices. Compared to a year earlier, they climbed 22.9 per cent in May and helped drive overall energy prices for the month 11.6 per cent higher.

Inflation also received a lift because Canadians paid more last month for restaurants, airline tickets and mortgage interest costs.

Consumers, however, paid less in May for telephone services, natural gas and digital devices and computers.

The report also found the average of the Bank of Canada’s three measures of core inflation, which leave out more-volatile numbers like pump prices, slowed to 1.9 per cent last month.

The core readings, which are closely monitored by the central bank, averaged 2.03 per cent in April, which was the strongest pace in six years.

On retail trade, the April contraction of 1.2 per cent pulled total sales down to $49.5 billion.

The April decrease was mostly due to a 4.3 per cent decline in sales by motor vehicle and parts dealers _ with new car dealerships reporting a 5.1 per cent drop and used car lots seeing a contraction of 4.1 per cent.

Statistics Canada said April’s unusually cool temperatures and bad weather in many parts of the country may have been to blame for the overall decline.

The decrease was concentrated in the largest provinces. Sales fell 2.3 per cent in Ontario, while Quebec saw a 2.7 per cent drop.

Statistics Canada, however, did release an upward revision to its retail sales data for March. The updated reading shows a 0.8 per cent increase, compared to its preliminary 0.6 per cent estimate.

Friday’s reports will help feed the Bank of Canada’s deliberations as its governing council considers its next interest rate decision.

For inflation, the bank can use interest rate hikes as a tool to help prevent it from climbing too high. The Bank of Canada tries to keep inflation from moving outside a range of between one and three per cent.

Recent inflation readings _ including Friday’s _ have been hovering just above the two per cent mid-point of the bank’s target range.

It’s unlikely, however, to have a significant impact on upcoming rate decisions because governor Poloz has predicted inflation to stay above two per cent for all of 2018. He’s predicted inflation to average 2.3 per cent this year before settling back down to 2.1 per cent in 2019 _ in large part due to the temporary effects of higher gas prices and the introduction of minimum wage increases in some provinces.

He’s raised the trend-setting interest rate three times since last July, but he hasn’t touched the rate since January. It’s been at 1.25 per cent ever since.

While the Canadian real estate market remains vigorous in large part due to robust market activity (especially in the higher-end segments), the International Monetary Fund has warned of potential headwinds that could affect housing values – and might even trigger a domino effect that would ultimately harm the national economy.

Noting that real estate prices are a “key domestic risk”, the IMF specifically cited mortgage rates, price expectations, and unemployment as crucial metrics to watch out for. In a new analysis, real estate information portal Better Dwelling stressed that together, these factors are indeed a dangerous cocktail of instability.

The clear upward trend in mortgage rates is probably the main cause for concern, Better Dwelling stated. Probably the most notable example of recent such increases is the Bank of Canada’s decision to hike its average 5-year fixed rate to 5.34%, representing 15.08% year-over-year growth.

“That hike by itself reduces the maximum mortgages that can be borrowed by just over 7%. Not to mention the impact to the wallet of the nearly 50% of homeowners expected to renew their mortgages this year,” Better Dwelling stated.

Read more: Canadian households increasingly relying on debt to stay afloat – study

A sudden, shocking adjustment in real estate prices also remains an ever-present possibility, according to the analysis. This is not helped by the fact that home prices nationwide have moved wildly (both upwards and downwards) since 2003, a clear departure from the previous decades.

“According to the US Reserve Bank of Dallas, real home prices in Canada are down 5.72% from the second quarter of 2017. People haven’t been paying too much attention to it due to the fact that prices were up 4.45% from the previous year. However, price declines stall demand, which feeds lower prices.”

And while unemployment levels are still hovering close to record lows, the situation might have planted the seeds of future weakness.

“Higher wages sound great, but at the phase of full-employment, it accelerates inflation. The acceleration of inflation has the counterintuitive effect of devaluing all wages. You make more, but you can buy less,” Better Dwelling cautioned. “Full employment is generally considered below 6% in Canada, and we’re at 5.8%. You should expect wages to pop, inflation to soar, and/or employment to jump higher. The move results in decreased profitability for businesses, often forcing them to look for ‘efficiencies’.”

OTTAWA — Canada’s housing market and high levels of consumer indebtedness remain the top vulnerabilities for the financial system but both have shown signs of easing, according to the Bank of Canada.

The central bank said in a report that worries about the amount Canadians owe have begun to pull back, but it remains a concern.

“Because the total amount of debt carried by Canadian households is so large, we know that it will be with us for a long time,” Bank of Canada governor Stephen Poloz told a news conference.

The assessment came in the Bank of Canada’s latest financial system review, which assesses key vulnerabilities that could amplify or propagate economic shocks.

Key risks associated with the vulnerabilities include a severe recession, a house price correction in overheated markets, and a sharp spike in long-term interest rates.

Federal mortgage lending rules have been tightening in recent years with the application of stress tests on borrowers. New rules implemented at the start of this year introduced a test for borrowers who do not require mortgage insurance and had not previously been subject to stress testing.

The central bank said it will monitor the extent to which borrowers seek out alternative lenders, such as credit unions and private lenders, who are not always subject to the federal rules.

“It’s still too soon to fully assess the impact of the newest changes to mortgage lending guidelines,” said Poloz, who added the bank is scrutinizing the housing and mortgage data as it becomes available.

The tighter lending rules, and higher mortgage rates from lenders, have helped to cool the housing market in recent months from the red-hot pace it set at the start of last year.

The central bank has raised its key interest rate three times since last summer and is expected to raise it again later this year, perhaps as soon as July. The increases have prompted the big Canadian banks to raise their prime rates, which are used to set the rates charged for variable-rate mortgages and other floating-rate loans. The cost of new fixed-rate mortgages has also climbed in recent months as bond yields have risen.

In assessing the housing market risk, the report noted that housing price growth has slowed, led by a drop in the Greater Toronto Area. However, it said the condominium markets in Toronto and Vancouver remain strong with some evidence of speculative activity.

In addition to household debt and the housing market, the report also identified cyberattacks as a key area of concern.

“Even as defensive capacity improves across the financial system, some attacks will inevitability succeed,” the report said. “Having strong recovery plans can help to quickly restore financial system functioning and prevent a loss in confidence.”

Last week, two of Canada’s biggest banks warned that personal and financial information of up to 90,000 customers may have been accessed by “fraudsters.”

The Bank of Canada report comes as fears of a trade war have increased with the U.S. implementing new tariffs on steel and aluminum imports and Canada replying with its own tariffs on U.S. goods.

Poloz said the impact of the tariffs will be part of the Bank of Canada’s next monetary policy report, but added that the overall economic backdrop has improved over the past six months and that’s good for financial stability.

The Bank of Canada announced Thursday that it will no longer publish its financial system review report twice a year.

The report will become an annual review published in June, and a member of the bank’s governing council will make a speech in the fall to update its assessment of the vulnerabilities and risks to the financial system.

It will also create a new financial system hub on its website that will publish research and analyses throughout the year.

The Bank of Canada’s quarterly monetary policy report will also include a more in-depth discussion of the relevant issues as warranted.

Today’s May employment report showed the jobless rate dropping unexpectedly even further to 3.8%–considerably below the level the Fed once considered to be full employment. It wasn’t long ago that the Fed estimated the long-run equilibrium jobless rate in the range of 4.3%-to-4.7%. Economic theory tells us that very tight labour markets can generate inflation pressure, as firms bid up wages to attract and retain talent.

U.S. wage rates in May rose 2.7% (at an annual rate), compared to 2.6% in April and 2.5% in 2017. This is consistent with anecdotal evidence collected by the Fed indicating that inflation pressures are mounting in much of the country. According to the Fed’s Beige Book, firms are having increasing difficulty “filling positions across skill levels.”

The Fed policymakers meet again June 12-13, and it is likely they will continue to remove stimulus from the system, hiking overnight rates another 25 basis points to a range of 1.75%-to-2.0%. By the end of next year, the key overnight rate could be as high as 3.25%-to-3.5%, the level the Fed estimates to be neutral for the economy.

Short-term market rates in the U.S. increased this morning immediately following the release of the employment report.

Canadian interest rates do not move in lockstep with the U.S., but the Bank of Canada already signalled this week that it would likely hike its target overnight rate when it meets again in July.

Mortgage rates in Canada have already increased considerably as the 5-year government of Canada bond yield, at just over 2.1%, is up 1.15 percentage points over the past year. Put another way, the 5-year government of Canada bond yield was a mere 0.95% on June 1, 2017, and over the past year, it has risen by more than 120%.

With the Fed and the Bank of Canada continuing to hike interest rates, it is very likely that mortgage rates will continue to rise in both Canada and the U.S.

OTTAWA _ The Bank of Canada kept its key interest rate target on hold Wednesday, but hinted that rate hikes could be coming as it noted the Canadian economy was a little stronger than expected in the first quarter.

The central bank held its target for the overnight rate _ a key financial benchmark that influences the prime lending rates at the country’s big banks _ steady at 1.25 per cent.

“Exports of goods were more robust than forecast and data on imports of machinery and equipment suggest continued recovery in investment,” the Bank of Canada said in a statement.

“Housing resale activity has remained soft into the second quarter, as the housing market continues to adjust to new mortgage guidelines and higher borrowing rates. Going forward, solid labour income growth supports the expectation that housing activity will pick up and consumption will continue to contribute importantly to growth in 2018.”

The central bank also said global economic activity remains broadly on track, but added that ongoing uncertainty about trade policies is dampening global business investment and stresses are developing in some emerging market economies.

It noted that recent developments have reinforced its view that higher rates will be warranted to keep inflation near its target, but added that it will take a gradual approach and be guided by the economic data.

“In particular, the bank will continue to assess the economy’s sensitivity to interest rate movements and the evolution of economic capacity,” it said.

Economists had predicted the Bank of Canada would keep its key rate on hold Wednesday, but many have suggested the rate may be headed higher later this year.

The central bank’s decision to keep its trend-setting rate on hold came as inflation sits above the two per cent midpoint of its target range of one to three per cent and core inflation has crept past the two per cent mark for the first time since 2012.

It noted that inflation will likely be a bit higher in the near term than was forecast in its April monetary policy report due to recent increases in gasoline prices, but that it will look through the transitory impact of the fluctuations at the pump.

The central bank has raised its key rate three times since last summer, increases that have prompted the big Canadian banks to raise their prime rates which are used to set the rates charged for variable-rate mortgages and other variable-rate loans.

Its next scheduled interest rate decision is set for July 11 when it will also update its outlook for the economy and inflation in its monetary policy report.