Rate Hike Expectations still Growing.

With inflation well above the Bank of Canada’s target level and ongoing supply chain issues, expectations of earlier-than-expected interest rate hikes in 2022 are growing.

For much of the past year, the Bank of Canada had assured markets that interest rate hikes were off the table for at least the next year or longer. In January, the BoC had said, “We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved…In the Bank’s January projection, this does not happen until into 2023.”

Fast-forward to today, and rate hike expectations are growing by the week, with some seeing the first rate increases by mid-2022.

Scotiabank made headlines last week with its aggressive forecast for four quarter-point rate hikes in 2022, followed by four quarter-point hikes in 2023. That would mean a Bank of Canada target rate of 2.25% by the end of 2023—well above its current level of 0.25%, and higher than any other bank forecast.

No rate hikes are expected when the Bank meets this Wednesday, but all eyes will be on its statement and accompanying Monetary Policy Report for clues of a shifting outlook given the inflation and supply issues mentioned above.

Here’s a look at what some economists expect from the BoC at its Wednesday meeting:

On further winding down of Quantitative Easing (QE):

• TD: “This winding down of emergency stimulus isn’t a shock for Canadians. The Bank of Canada has been leading the pack, cutting its government bond purchases over the last year and completely ending programs that were no longer needed (mortgage bond purchases, for example). We expect the Bank to make another reduction in its bond purchases in October and cease all net-new purchases at the beginning of 2022.” (Source)

On rate hike expectations:

• BMO: “The interest rate landscape is shifting rapidly amid the sustained strength in a wide variety of inflation measures. Short-term bond yields have bolted higher as inflation has surged to the fastest pace in decades in many economies. Markets are now pricing in almost four rate hikes by the Bank of Canada by the end of 2022, compared with almost nothing just two short months ago.” (Source)
• Desjardins: “Without the BoC even blinking, the 5‑year yield, one of the most influential rates in Canada’s financial ecosystem, is up nearly 47 basis points since early September. We expect it to rise by about 30 more basis points by the time the BoC finally hikes rates, meaning tightening is already underway. Which begs the question of why many appear to feel that the BoC should be in a rush.” (Source)

On inflation:

• BMO: “Canadian inflation has broadened out from an initial rebound in beaten-down prices (gasoline) and reopening pressures (airfares, hotels), to supply-constrained items (autos, appliances), to homes, and now to food. We now expect headline inflation to average 3.3% both this year and next—in perspective, inflation has not averaged 3% for a single year since 1991, let alone two years in a row.” (Source)
• RBC: “Central banks are acknowledging inflation will be more persistent than previously expected, but there’s little they can do to resolve supply chain bottlenecks and rising energy prices. Most continue to focus on supporting a complete economic recovery.”  (Source)
• NBC: While other central banks (most notably, the BOE) have begun sounding the alarm on inflation, [Bank of Canada Governor] Tiff Macklem appears committed to the Bank’s transitory inflation narrative, reiterating this view in recent weeks. As such, we’re not looking for a significant change in tone, though we will likely get an acknowledgement of stronger-than-expected price hikes to date and potential upside risks ahead.” (Source)
• Desjardins: “…our estimates show that the annual inflation rate reached a cyclical peak in September and could start to decline slowly in the coming months. Despite this encouraging prognosis, the risks of inflation continuing to rise in the coming months or remaining at its peak for longer are quite high.” (Source)

On GDP forecasts:

• RBC: “We expect the central bank will revise its near–term GDP projections lower in October. It was previously looking for 6% growth in 2021, whereas our latest call is 5.1%. Our forecast remains consistent with the bank’s guidance that economic slack will be absorbed in the second half of next year, though there’s some risk that time-frame will be pushed back depending on how much of the recent growth shortfall is seen being made up in 2022.” (Source)
• NBC: “With growth stumbling recently, a markdown to the GDP outlook seems all but certain.” (Source)

Big 6 Bank Interest Rate Forecasts

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