All eyes will be on the Bank of Canada’s rate decision on Wednesday, which could see the largest rate hike in over 20 years.
A majority of forecasts—including from all of the Big Six banks—expect the BoC to increase interest rates another 50 basis points, which would bring the target overnight to 3.20%, increasing interest costs for variable-rate mortgage holders and those with personal or home equity lines of credit.
“Given that they (the BoC) are already well behind the curve on tightening and inflation is well above their 2% target, there’s really no reason for them to wait any longer and they really should be getting policy rates up to neutral as quickly as they can,” BMO’s Benjamin Reitzes told Reuters.
Here’s a collection of comments and outlooks released recently related to the BoC’s upcoming meeting on Wednesday:
On rate hike expectations:
- National Bank of Canada: “A 50 basis point hike by the Bank of Canada next week is overwhelmingly the right call for an economy this strong. In fact, labour market and inflation conditions increasingly justify a series of 50 bp moves (next week, again in June and perhaps another double in July), in order to get the policy rate closer to neutral quicker. After all, full employment and stimulative monetary policy are meant to be mutually exclusive. Credit bond market participants for getting on this call well ahead of economists.” (Source)
- Josh Nye, RBC: “We look for a 50 bp increase in April (alongside a QT announcement) to be followed by a series of 25 bp hikes, bringing the overnight rate to 2% by year-end. That’s slightly above last cycle’s 1.75% peak, but we don’t see the BoC going further from there. (Source)
- TD Economics: “Given the starting point of emergency level interest rates, this will likely be the swiftest pace of rate hikes since 2005. Not to mention, we expect the central banks to simultaneously reduce the size of their balance sheets. This has markets moving fast, maybe too fast. The Fed and Bank of Canada will have to be nimble as they tighten policy without derailing the economy.” (Source)
On what to expect from the BoC statement:
- Avery Shenfeld, CIBC: “Pay no attention to what will be a hawkish tone to the rate hike statement. There’s no such thing as a dovish statement when you’re announcing a 50-basis point hike, unless you’re sure it’s the last tightening needed. The statement has to be devoted to explaining to Canadians why we need the pain of higher borrowing costs, so there’s no room for anything that sounds like concerns about sub-par growth or a lack of inflation pressures.” (Source)
- Deputy BoC Governor Sharon Kozicki: “…while we will watch developments with respect to households closely as we proceed, it’s important to be clear that returning inflation to the 2% target is our primary focus and unwavering commitment. We have taken action and will continue to do so to return inflation to target, and we are prepared to act forcefully.” (Source)
- Economist David Rosenberg: “What bothers me is that the government just … made the Bank of Canada’s anti-inflation strategy that much more complicated because when you look at the budget, it adds about one-third of a percentage point to this year’s aggregate demand growth that it doesn’t really need from a government sector. And actually, when you think about it, it’s exactly the wrong time of the cycle.” (Source)
- Avery Shenfeld, CIBC: “All eyes will be on the revised and likely upgraded inflation forecasts, but they reveal less about the path of future rate hikes than one might think. The projections are missing what really counts, which is how many rate hikes the BoC believes it will need to pare growth enough through 2024 to get inflation back to target. Instead of the forecast, look for any discussions about interest sensitivity, external headwinds or tailwinds for the economy, which could provide more insight.” (Source)
On Quantitative tightening (QT):
- James Knightley, ING: “Comments from BoC Governor Tiff Macklem in March indicated that BoC may simply end reinvestments of maturing assets rather than the Fed’s proposed “phased in” caps for what is allowed to roll off the balance sheet. With more than a third of BoC’s asset holdings having a maturity of two years or less, we could see the BoC’s balance sheet shrink far more quickly than the Fed’s which is proposing shrinking its balance sheet by $95bn (or around 1% of the balance sheet) per month.”
Latest rate forecasts
The following are the latest interest rate and bond yield forecasts from the Big 6 banks, with any changes from their previous forecasts in parenthesis.
|5-Year BoC Bond Yield:
|5-Year BoC Bond Yield:
|BMO||2.00% (+50 bps)||2.50% (+50 bps)||NA||2.60% (+75 bps)||2.70% (+45 bps)|
|CIBC||1.75% (+50 bps)||2.25% (+50 bps)||NA||NA||NA|
|NBC||1.50%||1.75%||NA||2.00%||1.95% (-10 bps)|
|RBC||2.00% (+75 bps)||2.00% (+25 bps)||NA||2.20% (+35 bps)||1.95% (-15 bps)|
|TD||1.75% (+25bps)||2.00% (+25bps)||NA||2.20% (+10 bps)||2.05% (+5 bps)|