Bank of Canada 50-basis-point June 1 hike a done deal, economists say
The Bank of Canada will hike its overnight rate by 50 basis points on June 1, according to all 30 economists polled by Reuters, who see interest rates at least a half-point higher by year-end than predicted just one month ago.
The BoC seems set to follow an aggressive path similar to that taken by the Federal Reserve to tame soaring inflation, which hit over a three-decade high of 6.8% in April and has now been above the central bank’s 1-3% range for more than a year.
After a 50 basis-point hike in April, its biggest single increase in 22 years, BoC Governor Tiff Macklem said interest rates may need to go above the neutral range – currently estimated to be between 2% and 3% – for a period of time to get inflation back to target.
The BoC was expected to lift its overnight rate by another half a percentage point at its June 1 meeting, taking its lending rate to 1.50%, according to all respondents in a May 20-25 poll. That was in line with money markets pricing.
Just a month back, economists forecasted a 25-basis-point hike in June.
“The BoC is laser-focused on taming inflation but once the overnight rate reaches a more neutral level, it will be more conscious of the potential trade-off between returning inflation expediently to target and prolonging the economic cycle,” said Josh Nye, senior economist at Royal Bank of Canada.
“We don’t expect the BoC will make monetary policy restrictive but if stubbornly high inflation forces it to do so that would amplify recession risk.”
A smaller sample of economists who answered an additional question were nearly split on whether the current tightening campaign would lead to a recession, with seven of 14 saying it would not and the remaining it would trigger one.
Canada’s economy is likely to be particularly sensitive to higher rates after Canadians borrowed heavily during the pandemic to participate in a red-hot housing market.
Thirteen of 30 respondents in the poll forecasted rates to rise to 2.25% in the third quarter, 10 expected rates to be 2.00% and six expected 2.50%. Only one economist expected rates to be 1.75% by end-September.
After that, 25 of 30 respondents expected rates to rise to 2.50% or more in the fourth quarter, including six predicting them to reach 2.75% and another six expecting rates at 3.00% by end-2022. Only four expected rates to be 2.25% and one predicted rates to be 1.75%.
Poll medians showed rates at 2.25% next quarter and 2.50% in the fourth quarter. The BoC was expected to hike rates to 2.75% in the first quarter of 2023 and stay on the sidelines at least until the end of next year.
Inflation was expected to average 5.9% this quarter before easing to 5.0% and 4.4% in the next two quarters, according to a separate poll.
While inflation was expected to cool significantly next year it was still forecast to stay above the central bank’s target until at least 2024.
“Right now, the BoC’s attention remains firmly focused on inflation. Gov. Macklem hinted that market expectations of a 50-basis-point hike in June would likely be met as he promised to restore price stability ‘forcefully’ if needed,” noted Christian Lawrence, senior cross-asset strategist at Rabobank.
“That said, the dangers of hiking into a recession are not lost on the bank, but dampening demand is the only tool they have to try to slow inflation, and that spending needs to be moderated to try to reach an equilibrium. Rising inflation expectations are a core concern,” Lawrence said.