This week’s decision on interest rates by the Bank of Canada will be a close call, say economists at TD Bank, but the central bank is likely tilting toward another hike.

The central bank will announce its decision on Tuesday morning.

“The Bank of Canada was supposed to be done – or so we thought. The statement following the last Fixed Announcement Date certainly left little doubt on that front,” it said. “Barring a complete blow-out on the data front, there was little reason to expect otherwise – the Bank was done. Not surprisingly, the markets completely priced out any implied probability of a rate hike on July 11th.”

“What we got in the interim, however, was in fact exactly that – a blow-out on the data front,” TD says. Not all the data were strong, it allows, “However, both the employment data, and the most recent CPI release may well have changed the Bank of Canada’s base-case, by changing its perception of the extent to which capacity constraints may be building in the Canadian economy, and consequently the extent to which inflation pressures may be building.”

“As a result, the odds now appear to be ever so slightly tilted towards the Bank of Canada tightening the monetary screws again next week. And that is what markets are expecting as well – in fact, they are pricing in one more hike. However, this one is not a slam-dunk – it truly is a very close call,” it declares.

“While Governor Dodge and Senior Deputy Governor Jenkins stated in recent speeches that recent data are ‘not inconsistent’ with the Bank’s outlook as spelled out in the April MPR, they also indicated that the Bank will be looking at all the data in order to assess the situation in advance of the FAD on Tuesday and the Monetary Policy Report Update on Thursday. The issue for Mr. Dodge and company is whether their current outlook for inflation will hold against that backdrop. And, that is a very, very close call,” TD concludes. “While it could go either way, we would bet on a hike.”