The central bank should raise the policy rate by 50 or 75 basis points as part of the Bank’s strategy of forward rate hikes
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Canada’s top economists expect the Bank of Canada to deliver another outsized rate hike on Wednesday in its ongoing fight against decades-high inflation.
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The central bank is expected to raise the policy rate by 50 or 75 basis points as part of the Bank’s strategy of early rate hikes, but comes at a time of growing calls for recession. Some economists expect the Bank to ease off the accelerator following this rate decision.
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The Bank of Canada has already raised the policy rate by three percentage points during the year, bringing the overnight rate to 3.25%. The Desjardins team expects Bank of Canada Governor Tiff Macklem’s tough rhetoric on inflation to prompt him to raise rates another 75 basis points to 4%.
“Governor Macklem knows he can’t go on like this forever,” wrote Royce Mendes, managing director and head of macro strategy at Desjardins, and partner Tiago Figueiredo in an Oct. 21 note, adding that a rise in this magnitude is consistent with the Bank. strategy for increasing frontloading rates.
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“But we expect the accompanying statement or press conference to at least implicitly admit that future adjustments will not be as significant,” they added. “They might even specify that the central bank will move in December to the more finely balanced, decision-by-decision approach that Macklem has recently alluded to.”
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Should the Bank decide to shift gears and slow the pace of tightening, it would be guided by crucial details expected in the monetary policy report accompanying the rate decision. It is only once these new economic forecasts are clarified that the Bank can initiate major changes in policy and communication, according to Desjardins.
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As central banks around the world embark on the same rate-hike mission, the drumbeat of global recession risks grows stronger. It’s a growing risk that central bankers can no longer afford to ignore, the Desjardins team said.
“Overall, central bankers are in uncharted territory and there are many unknowns,” Mendes and Figueiredo wrote. “But we expect them to recognize both the likelihood of a recession and the likelihood that future rate hikes will be lower. At this point, their graveyard whistle simply isn’t fooling anyone.
The big six banks are also raising red flags, as the Royal Bank of Canada maintains its expectation of a moderate recession in the first half of next year. RBC is not alone; the Bank of Nova Scotia echoed that sentiment with chief economist Jean-Francois Perrault predicting a technical recession in 2023 and for the terminal rate, or the likely rate the Bank will max out before cutting, at 4 .25%.
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The RBC Economics team, which also expects the central bank to go big with its rate decision on Wednesday with a 50 basis point hike, also pointed to slowing economic growth. Nathan Janzen, deputy chief economist at RBC Economics, pointed to a 0.6% decline in hours worked in September and signaled weakening sentiment in the Bank of Canada’s third quarter business outlook survey released October 17. This most recent survey revealed the most severe decline. of the business climate since the start of the pandemic in Canada.
Rising rates have worked their way through the economy, weighing on demand and growth. Despite the drive to rebalance demand with tight supply, the latest inflation reading in September came in higher than expected at 6.9% year-on-year. Excluding food and energy, inflation increased at an annualized rate of 5.4% against 5.3% recorded a month earlier.
This latest data point raised the odds of another oversized hike by 75 basis points for some economists. To bring this pace of inflation to a halt, Canada may have to contend with more quarters of slower growth.
“But inflation is unlikely to return fully and sustainably to the central bank’s target range of 2-3% until the economy slows further,” Janzen said in an Oct. 21 note. “That keeps monetary policymakers firmly focused on rate hikes, even as the growth outlook softens.”
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