!["We expect the economy to lose momentum before the year is out, prompting the bank to abort its rate hike cycle," said ...](http://web.archive.org./web/20170907014951/http://www.afr.com/content/dam/images/g/v/d/w/2/q/image.related.afrArticleLead.620x350.gycd8e.png/1504729831456.jpg)
The Bank of Canada, in recognition of the nation's booming economy, lifted interest rates for a second time in as many policy meetings and investors now are positioning for a third hike before the end of the calendar year, perhaps as early as next month.
The decision jolted the Canadian dollar above US82¢ for the first time in more than 2 years, and the central bank signalled little concern about its appreciation; it's now up near 10 per cent against the greenback this year. It recently was up 1.2 per cent at US81.80¢. Against the Australian dollar, the Loonie leapt 1.3 per cent to $1.0235, its highest since January.
The Canadian dollar is expected to continue to appreciate in value amid bets the Bank of Canada isn't done yet and amid rising optimism about the price of oil. In addition, bets have eased on whether the US central bank will vote for a third rate hike later this year.
Bank of Montreal chief economist Doug Porter said he has revised higher his forecast for the bank's key rate to 2 per cent by the end of 2018, up from a previous 1.5 per cent call.
![The Loonie's upward momentum v the Aussie.](http://web.archive.org./web/20170907014951/http://www.afr.com/content/dam/images/g/y/c/d/h/3/image.imgtype.afrArticleInline.620x0.png/1504729822836.png)
"Given today's abrupt hike, with no prior communication since the previous meeting, and the bank's seeming care-free stance on the soaring Canadian dollar, we can't rule out anything in coming meetings," Mr Porter said.
"However, we suspect that the bank is likely to take a brief pause now that they have reversed the emergency cuts (taken in 2015 to offset the plunge in the price of oil). Still, the somewhat aggressive hike and the upbeat view on growth point to more tightening than we previously expected over the next year," Mr Porter added.
The next scheduled date for announcing the overnight rate target is October 25. The next full update of the bank's outlook for the economy and inflation, including risks to the projection, will be published at the same time.
In its post-meeting statement overnight, the bank said "significant geopolitical risks and uncertainties around international trade and fiscal policies remain, leading to a weaker US dollar against many major currencies. In this context, the Canadian dollar has appreciated, also reflecting the relative strength of Canada's economy".
Mr Porter said the Bank of Canada commentary suggested policy makers are "essentially offering a green light for more strength".
Royal Bank of Canada economist Josh Nye also is bullish on the rate outlook.
"We had expected the bank would hold off on another rate increase until October when its growth forecasts are refreshed," Mr Nye said. "We think those projections will show the economy near capacity in Q3, though today's indication that policymakers will have an eye on the economy's potential growth gives them some flexibility on that front.
"On balance, limited economic slack, solid growth momentum, and 'considerable' stimulus remaining in the system support the case for another rate hike before the end of the year," Mr Nye said.
To be sure, there are some sceptics, in particular David Madani, senior Canada economist at Capital Economics.
"Overall, the policy statement was hawkish and we can't rule out another rate hike before this year is over," said Mr Madani.
"But the economy is still overly dependent on the heavily indebted household sector to support growth. That was possible when housing prices were rising rapidly and interest rates were at record lows. But both of those supports are fading," Mr Madani said.
"With the housing market teetering even before rates began to rise, we expect the economy to lose momentum before the year is out, prompting the bank to abort its rate hike cycle," Mr Madani said.