Bank of Canada widely expected to deliver another 50-bps rate hike this week

Markets and economists fully expect the Bank of Canada to deliver its second half-point rate hike in as many months when it meets on Wednesday.

In June, the Bank hiked its overnight target rate by 50 basis points, bringing it to 1.00%, citing an “increasing risk” that expectations of high inflation could become “entrenched.”

With headline inflation reaching a 31-year high of 6.8% in April, and core inflation at a 32-year high of 4.23%, the Bank of Canada is widely expected to continue its aggressive pace of rate hikes in the coming months.

“We are confronted with an economy that is showing clear signs of overheating, very tight labour markets and this perfect inflationary storm of global events and [consumer spending] preference shifts,” Bank of Canada deputy governor Toni Gravelle said in a speech earlier this month. “Simply put, with demand running ahead of the economy’s capacity, we need higher interest rates to cool domestic inflation.”

Here’s a collection of comments and forecasts released recently concerning the BoC’s upcoming rate decision:

On what to expect:

• Taylor Schleich, National Bank of Canada: “Despite the rapid tightening in financial conditions, a nasty streak of upside inflation surprises means the Bank is in no position to ditch its hawkish stance and we don’t expect any push back against a third 50 basis point rate hike in July. We do, however, expect the statement’s rate guidance to remain vague and flexible, simply reiterating that ‘interest rates will need to rise further.’ Indeed, the Bank is likely to keep markets guessing how far above 2% the terminal rate will be and if their base case involves hiking into restrictive territory (i.e., above 3%).”

On the potential for a hike above 50 bps

• Derek Holt, Scotiabank: “With both growth and inflation tracking above forecasts…it may drive a further sense of concern at the Bank of Canada toward expediting rate hikes,” he wrote. “If I were them, I would not be as confident in ruling out the need for a bigger move in June. The BoC’s policy rate should be at neutral—and beyond—under current circumstances, let alone months or quarters from now.”
• Jimmy Jean, Desjardins: “The Bank of Canada will likely eschew anything larger than a 50-bps hike, deeming it a bridge too far. And while it’s easy to argue with that logic when inflation is tracking 7%, central bankers have made their feelings known. As a result, a 50-bps rate increase looks like a done deal. Expect yet another 50-bps move in July before policymakers shift to a more cautious approach to monetary tightening later this year.” (Source)

On additional rate hikes after this week:

• Andrew Grantham, CIBC: “…any admission that the housing market is already responding to higher interest rates should also be seen as an admission that excess demand is about to become less excessive. That is one of the key reasons why we think that, after another 50bp hike in July, the pace of hikes will slow down, and the Bank won’t need to take rates any higher than the 2.5% mid-point of its neutral band to achieve 2% inflation sometime in 2023.” (Source)

On the impact on Canada’s housing market

• Robert Hogue, RBC: “We think the sizable drop in [housing] activity in April marks a turning point for the Canadian market with further cooling on the way. The Bank of Canada’s setting out to aggressively normalize its monetary policy is a game-changer for the market—turning what has been a tremendous tailwind into a stiff headwind for the market.” (Source)
• Toni Gravelle, Deputy Governor of the BoC: “Rising interest rates are designed to slow the economy by making borrowing more expensive. That tends to slow sectors like housing. But this slowing might be amplified this time around because highly indebted households will face high debt-servicing costs and will likely reduce household spending more than they would have otherwise. Our base-case scenario includes a slowdown in housing activity. But we could see a larger-than-expected slowdown due to higher indebtedness and unsustainably high housing prices.” (Source)

On the potential for rate cuts in the years ahead:

• Dave Larock, mortgage broker, Integrated Mortgage Planners: “I think the BoC will be more cautious than the market predicts [in 2022]…Furthermore, if the Bank hikes by more than expected, I think that will significantly increase the odds that a recession ensues and that rate cuts then follow.” (Source)
• Rob McLister, rate analyst and editor of MortgageLogic.news: “The probability of BoC reversing rates in the next five years increases with every BoC hike.” (Source)
• National Bank of Canada: “By the time 2024 rolls and we’ve endured a year and a half of uninspired growth, we see good reason to expect interest rate cuts. That’s effectively what we saw last cycle when the Fed was forced to cut rates after it hiked to 2.50% alongside a liquidity-draining QT exercise.” (Source)

The 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.