After back-to-back interest rates hikes, the Bank of Canada can stay on the sidelines for longer than first anticipated, with tighter mortgage rules slowing the housing market and uncertainty about NAFTA clouding the outlook.
While more rate increases are on the horizon, possibly before the end of the year, the central bank is expected to hold rates at 1 percent on Wednesday as the list of unknowns and a moderating economy force policymakers to watch and wait.
The unknown fate of the North American Free Trade Agreement, a stronger Canadian dollar and yet more housing regulation are conspiring to weigh on consumption and exports, slowing what had been an unexpectedly strong economic spurt early in the year.
Moreover, the Bank of Canada needs to assess how hikes in July and September play out, particularly since new mortgage regulations finalized last week by Canada's banking regulator add to the overall tightening effect on indebted households.
"Really, they're in uncharted territory," said David Madani, senior Canada economist at Capital Economics. "They've never really had to raise interest rates in an environment where housing regulation has been tightening."
The rules from the Office of the Superintendent of Financial Institutions (OSFI) come on top of separate moves by provincial government authorities to cool housing markets in Toronto and Vancouver.
"My philosophy right now is that (housing) rules are the new rates when it comes to housing," said Adam Button, currency analyst at ForexLive.
"Central banks have washed their hands of managing housing market inflation and have passed it onto governments and regulators."
Analysts will comb through Wednesday's policy statement for the bank's outlook on the housing market and how risks around trade policy have increased after an acrimonious end to recent NAFTA talks.
Bank of Canada Governor Stephen Poloz said earlier this month that while there would be a negative shock to the economy if talks collapse, the bank would wait to see what happened before deciding how to react.
Madani said that before the OSFI rules and the deterioration in the NAFTA talks, he had expected another rate hike in December. But he now sees the bank on hold into next year.
Others see a hike sooner, with third-quarter growth on track to match the central bank's 2 percent forecast and inflation ticking up.
"Core inflation is going to keep firming over the next few months just in response to the growth we've had over the last year, so that will support a couple more rate hikes," said Robert Both, macro strategist at TD Securities. He sees a hike in December and one more in March before the bank pauses.
Markets see 47.2 percent odds of a third rate hike in December, while the median forecast in a Reuters poll also predicted another hike before the year is out. [CAD/POLL]
(Reporting by Leah Schnurr in Ottawa; Additional reporting by Fergal Smith in Toronto; Editing by Dan Grebler)