RBC says Bank of Canada is not done raising yet, calling for recession in 2023
TD Securities thinks there’s more room to run for the Bank of Canada as it increases interest rates from the pandemic lows.
In a note to clients Wednesday, TD Securities Chief Canada Strategist Andrew Kelvin raised his view of the terminal rate – the point at which the central bank will top out in the current hiking cycle – to four per cent from his prior call for 3.5 per cent, and said an even higher rate could potentially be in the cards.
“The BoC's hawkish ambiguity implies a wider range of potential terminal rates for Canada,” he said.
“We see anything from 3.50 per cent to 4.75 per cent as plausible, and think a four per cent terminal rate strikes a nice balance of maintaining BoC credibility and not unduly burdening the household sector.”
Kelvin said the central bank will likely pull back on the size of its rate increases from the outsized 75 and 100 basis point moves we’ve seen at recent meetings, penciling in a quarter of a percentage point move at the October, December and January meetings.
He also warned that the central bank will risk taking a hit to its credibility should it not continue its tightening cycle.
“We expect the pace of BoC tightening to slow in coming meetings, and now that policy settings are firmly into restrictive territory we think the most prudent course of action would to move in 25bp increments,” he said.
“At the same time, market expectations have a way of becoming self-fulfilling — with questions lingering about credibility, the BoC cannot risk material downside surprises relative to market expectations.”
The Bank of Canada has been aggressively increasing interest rates over the course of the year, hiking its benchmark policy rate five times to reach 3.25 per cent, up from the pandemic lows of 0.25 per cent. That’s in a bid to tamp down sky-high inflation, which hit a four-decade high of 8.1 per cent year-over-year before moderating to a 7.6 per cent pace – still more than triple the two per cent target.
TD’s call comes on the heels of Scotiabank also forecasting the Bank of Canada will be forced to move further into restrictive territory – the range in which interest rates ultimately curb economic growth – due in part to the federal government’s latest $4.5-billion spending plan to help Canadians cope with the rising cost of living.
Scotia vice-president and head of capital markets economics Derek Holt said the inflationary impact of the federal government’s new spending promises would likely force the central bank to hike its benchmark rate to more than four per cent.
“We will be assessing the implications for price pressures into [the first half of 2023] but it seems sensible to assume that this will add to pressures on measures of core inflation relative to what would have otherwise occurred and hence aggravate the Bank of Canada’s stance on monetary policy,” Holt said in a note to clients Tuesday.
The federal government is proposing to double the sales-tax rebate for low-income Canadians for six months and will top up a household benefit for renters.
Scotia’s Holt said that Tuesday’s hot U.S. inflation print and the federal government’s increased spending plans mean Canadians should expect higher borrowing costs by year-end.
“Any belief that it will ease inflationary pressures must have studied different economics textbooks. The information today suggests that the Bank of Canada is likely to be dragged along by the Fed with domestic fiscal stimulus reinforcing the likelihood that the policy rate breaches four per cent by December if not October.”