Bank of Canada sets for another supersized increase even as the outlook darkens

© Stocksak. FILEPHOTO: A sign can be seen outside the Bank of Canada building, Ottawa, Ontario, Canada on May 23, 2017. REUTERS/Chris Wattie

By Julie Gordon

OTTAWA (Stocksak), Canada – As persistently high inflation outweighs concerns that the rapid pace of tightening could trigger a recession, it is widely expected that the Bank of Canada will raise rates by three-quarters of a point to a new 14-year high.

Five of Canada’s six biggest banks forecast a 75-basis point increase to 4.0%. One bank instead calls for a 50 bp move. ET (1400 GMT).

Money markets expect a 70% chance for a bigger increase and are betting that the policy rates will peak at 4.5% next Spring.

“Another chunky 75-bp rate hike is likely coming… and policymakers aren’t ready to back off one iota yet,” said Benjamin Reitzes, Canadian rates & macro strategist at BMO Capital Markets, in a note.

The Bank of Canada raised its policy rate by 300 basis points since March. This makes it one of the most aggressive central banks. Its rapid pace has caused mounting concerns that Canada’s economy may slip into recession.

The central bank will release revised economic projections Wednesday. They are expected show a dimming outlook for both the Canadian economy and the global economy, as well as some hints of improvement in inflation.

“I think they’re going to forecast the downshift in growth that was aiming to achieve, and the narrowing the positive output gap,” stated Simon Harvey, head FX analysis at Monex Europe.

“I don’t think that we’re going necessarily to see the Bank of Canada factoring a recession in their base case. I think they’re going instead to forecast a stagnant phase of growth,” he said.

Inflation dropped to 6.9% in September after reaching 8.1% in June’s peak. This is better than what central bank forecasted in July when it predicted that inflation would average around 8.1% in the middle of 2022.

Analysts still see the path to 2% as slow and uncertain, with a return of target in the second half 2024. Analysts also believe that near-term inflation expectations will remain a concern. Accordingly, it is likely that Bank of Canada Governor Tiff Maklem will remain hawkish, at the very least for now.

“Macklem may not have a pivot yet but it’s worth reiterating central bank statements have short shelf life,” stated Andrew Kelvin, chief Canada strategist, TD Securities in a note.

“He might be more circumspect at the beginning December.”

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