'More rate hikes coming from Bank of Canada' in coming months: Portfolio manager
The Bank of Canada is set to release its latest interest rate decision on Wednesday and economists are largely anticipating rates to remain on hold yet again.
The overnight lending rate has been on pause at 4.50 per cent since January, and while there have been growing calls for a possible hike this week and even more so for July, the average consensus between economists tracked by Bloomberg is for a rate pause in June.
“We lean to a pause this week, but wouldn’t be shocked if they opt to hike,” Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO Capital Markets, wrote in a note to clients on Monday.
He pointed to the strength in Canada’s gross domestic product (GDP), which grew at an annualized rate of 3.1 per cent in the first quarter of 2023, and increased housing activity, as key economic data points the bank will take into consideration ahead of Wednesday’s decision.
Reitzes cautioned that if the economy continues on this trajectory and exceeds the bank’s two per cent inflation target rate – additional tightening will be needed.
“BMO is now forecasting a 25-basis-point hike in July, as the economy isn’t expected to falter meaningfully over the next six weeks,” he wrote.
Desjardins' economists are also calling for a rate pause this week, though see an increased chance of rate hikes ahead.
“The belief that the central bank will further tighten policy this summer is justifiably gaining traction,” Royce Mendes, managing director and head of macro strategy at Desjardins, wrote in a note to clients on May 31.
This is also the position that RBC economists have taken.
“Further signs that higher interest rates aren’t slowing the economy as expected would tip the scales towards a hike in July,” Claire Fan, economist at RBC, wrote in a note to clients on June 2.
Fan reasoned that for now the BoC is likely to hold rates as it awaits to see more data on inflation and the Business Outlook Survey.
“We think it (the BoC) will ultimately maintain the pause in hikes that began in January, keeping the overnight rate steady at 4.5 per cent,” she wrote.
THE CALL FOR A HIKE IN JUNE
There are three prominent economists calling for a rate hike Wednesday.
She argued that not enough was being done to tame runaway inflation, which is much higher than the bank’s inflation target rate.
Scoitabank’s chief economist Jean-François Perrault views April’s hotter-than-expected inflation as a call to action for the BoC.
“The risk of not doing enough, effectively implies that inflation doesn’t come down as much as we want, and that at the end of the day, you might need to do even more on the rate side later on to bring inflation down," he told BNN Bloomberg in a TV interview on May 23.
Joining them was Stephen Brown, senior Canada economist with Capital Economics.
“As GDP growth and CPI inflation have both surprised to the upside of the Bank of Canada’s forecasts, we now judge that it will raise interest rates new week rather than wait until July,” Brown wrote in a note to clients on May 31.
Brown thinks the market is underestimating the extent to which the bank might raise rates, especially it if does indeed hike this Wednesday and gives a hawkish sentiment.
The bank may raise the policy rate to 5.0 per cent by July, he cautioned.
This view is shared by Laurentian Bank’s chief economist Sébastien Lavoie who is calling for two 25 basis point rate hikes from the BoC.
“Stars are aligned for a 25 basis points hike at the next two policy meetings of June 7 and July 12, bringing the peak rate to 5.0 per cent,” he wrote in a note to clients on Monday.