Economists at J.P. Morgan expect the Bank of Canada will raise its benchmark interest rate at its Jan. 26 meeting, ahead of the central bank’s own timeline for liftoff.

“Based on rhetoric from the Bank of Canada in December, it was clear that labour market dynamics and outperforming economic data had created heightened concerns at the Bank that the output gap was closing more rapidly than expected,” wrote Silvana Dimino, a New York-based economist at J.P. Morgan, in a report to clients Tuesday.

Dimino sees the Bank raising its benchmark rate by 25 basis points to 0.5 per cent in January; her team previously called for the first move in April. She expects there will be five rate hikes this year, which would push the benchmark rate to 1.5 per cent by year-end.  

She also expects the Bank to begin a modest run off of its balance sheet in the second half of this year.

As of mid-day Wednesday, overnight index swaps pegged the probability of a January rate hike in Canada at 46 per cent.

In October, Bank of Canada Governor Tiff Macklem indicated he would not tighten policy until the economic recovery was complete – something he expected to happen in the “middle quarters” of this year. But data since then suggest the economy has been outperforming.

“We think the Bank will see the risks around the outlook and output gap and opt for a sooner recalibration of policy,” Dimino wrote. “The recovery and continued growth in the labour market after the severe provincial lockdowns of last spring has been nothing short of remarkable.”

Canada logged its seventh straight month of job growth in December, and while recently-renewed COVID-19 restrictions will weigh on the labour market in January and possibly February, Dimino said she thinks that will prove to be temporary.

“We expect virus-related disruptions and any hit to confidence to be short-lived; the increase in cases already looks to be slowing. While the Bank has cautiously acknowledged the uncertainty around past waves, the playbook has generally been to look through the temporary nature of any hit to activity,” she said.

However, Capital Economics presented a different view to clients Wednesday, predicting the Bank will wait until the renewed restrictions ease before triggering liftoff. Its team expects rates will start to rise in March or April.  

“While most advanced economies are in the middle of an Omicron wave, Canada stands out due to the extent of the restrictions that have been re-imposed,” wrote Stephen Brown, senior Canada economist at Capital Economics, in a note on Wednesday.

Brown also flagged the Bank’s commitment to an inclusive labour market, which has not yet been fully achieved despite strong headline jobs numbers.

“Ultimately, there is reason to think the Bank faces less immediate pressure to hike than some of its peers. Non-energy and food prices rose at a relatively muted pace in October and November, in contrast with the acceleration in the U.S. Unlike in the U.S., wage growth is also still below pre-pandemic rates,” he said.