Even as the outlook worsens, the Bank of Canada is planning another significant increase
As persistently broad and persistent inflation trumps concerns that the quick pace of tightening could lead to a recession, it is likely that the Bank of Canada will increase rates by another three-quarter of a percentage point, setting a new record high for the institution.
When the decision is announced at 10 a.m. ET, five of Canada’s six top banks predict a 75-basis point increase to 4 percent after inflation data last week came in hotter than expected (1400 GMT).
The policy rate is expected to peak at 4.5 percent next spring, according to the money markets, which predict a nearly 70% possibility of the greater increase.
“Another sizable 75-bp rate increase is probably on the way… Yet policymakers aren’t ready to back down even the slightest bit just yet, according to a report by Benjamin Reitzes, Canadian rates & macro analyst at BMO Capital Markets.
There are growing concerns that Canada’s economy will enter a recession as a result of the Bank of Canada’s 300 basis point policy rate increase since March, making it one of the more aggressive major central banks.
On Wednesday, the central bank will present revised economic estimates, which are anticipated to reveal a much gloomier picture for both the Canadian and world economy as well as some signs of improvement in inflation.
According to Simon Harvey, head of FX analysis at Monex Europe and Monex Canada, “I think we’re going to see them anticipating the downshift in growth that they were wanting to achieve and the closure of the positive output gap.”
As opposed to forecasting a period of stagnant growth, he continued, “I don’t think we’re necessarily going to see the Bank of Canada putting in a recession as their basic case.”
In the meantime, inflation decreased somewhat from its peak of 8.1 percent in June to 6.9 percent in September. When the central bank issued its inflation projection for the middle quarters of 2022 in July, it predicted inflation would average approximately 8%.
Analysts still expect a lengthy and rocky road to get back to the aim of 2 percent, with a return sometime in the second half of 2024. Analysts believe that Bank of Canada Governor Tiff Macklem will likely continue to hold a hawkish stance, at least for the time being, since near-term inflation forecasts continue to be of concern.
According to Andrew Kelvin, chief Canada strategist at TD Securities, “Macklem may not be close to a pivot yet, but it’s worth noting that central bank comments have short shelf lives.”
