Economy News

Bank of Canada March interest rate hike a done deal, say economists: Reuters poll

By Shrutee Sarkar

BENGALURU (Reuters) – The Bank of Canada will raise interest rates by 25 basis points on March 2, earlier than previously thought and ahead of the U.S. Federal Reserve, according to economists surveyed in a Reuters poll, which also showed expectations that rates will be higher by year-end than previously thought.

Just one month ago, economists predicted the BoC would wait until the second quarter to hike rates. But persistently higher inflation, which accelerated to a 30-year peak in January, prompted them to bring forward expectations.

Other major central banks, including the Fed and the Bank of England, are also expected to raise rates in March to tackle inflation which is at multi-decade highs, with some economists calling for an aggressive 50 basis-point move by the Fed.

The poll, which was conducted Feb. 17-23, found only a 20% median probability of a 50 basis-point rate rise at the BoC’s March meeting, with all 25 economists predicting a 25 basis-point hike to 0.50%.

“I would say they’re not behind the curve because inflation expectations are well-anchored,” said Andrew Kelvin, chief Canada strategist at TD Securities. “I think that’s probably the best way of framing this. But it is imperative they do hike rates now because if they wait any longer, they will be behind the curve.”

GRAPHIC: Bank of Canada monetary policy outlook –

BoC Deputy Governor Timothy Lane said last week there was a risk inflation could continue to be more persistent than forecast, adding that the central bank would be nimble and potentially “forceful” in tackling it. This would set the stage for a possible aggressive campaign of interest rate hikes.

Median forecasts in the poll showed the BoC would raise its key interest rate by 50 basis points to 1.00% next quarter and end the year with the rate at 1.25%, higher than an end-year prediction of 1.00% in a January poll but lower than current financial market expectations.

The median forecast showed the central bank would take interest rates higher by another 50 basis points in the second quarter followed by another 25 basis points in the third quarter, but economists were split on their views.

For the second quarter, 11 of 24 economists predicted a 25 basis-point rate rise and the rest expected rates to rise by at least 50 bps. The same number said rates would climb to 1.00% in the third quarter, while seven predicted rates to reach 1.25% and six said 1.50%.

While the fourth-quarter median showed rates at 1.25%, 11 of 24 respondents said rates would be at least 1.50%, including one who said 2.00%.

All 14 economists who responded to an extra question said the bank would start reducing the size of its balance sheet this year, with a majority saying in April. The others were split between March and June.

Unlike the Fed, the BoC – which owns about 42% of Canada’s sovereign debt – has never previously attempted to shrink its balance sheet, a process known as quantitative tightening (QT).

“The Bank will begin QT in April, shortly after its first rate hike in the prior month, and start to shrink its balance sheet by allowing maturing bonds to roll off without reinvesting the funds,” said Tony Stillo, director of Canada economics at Oxford Economics.

Nearly 55% of respondents, or seven of 13, who answered a separate question said inflation would not fall to the BoC’s 2% target until the second half of next year or later. Six said it would in the first half of 2023.

Respondents also expected this to be a short interest rate cycle as they put both the terminal rate and their estimated neutral rate at 2.00%, according to median forecasts from additional questions.

“The tightening cycle is playing out fast, with markets expecting an increasing and front-loaded number of rate hikes. However, household and corporate imbalances remain elevated,” said Dominique Lapointe, economist at Laurentian Bank.

“Combined with anticipated risk aversion and tighter overall financial conditions, we believe this will prevent the BoC and other central banks from hiking as much as the market currently predicts.”

(For other stories from the Reuters global economic poll:)

(Reporting and polling by Shrutee Sarkar in Bengaluru; Editing by Ross Finley and Matthew Lewis)

Source : Reuters

© Reuters. FILE PHOTO: A sign is pictured outside the Bank of Canada building in Ottawa, Ontario, Canada, May 23, 2017. REUTERS/Chris Wattie

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