May 29, 2023
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‘Enchanting past the graveyard’: Bank of Canada expected to soar on October rate hike as recession risks fade

The central bank is expected to raise the key interest rate by 50 or 75 basis points as part of the bank’s advantage-oriented rate hike strategy.

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Canada’s top economists expect the Bank of Canada to make another outsized rate hike on Wednesday in its fight against decades of high inflation.

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The central bank is expected to raise the key interest rate by 50 or 75 basis points as part of the bank’s forward-looking rate hike strategy, but it comes at a time when calls for a recession are getting louder. Some economists expect the bank to take its foot off the gas after this interest rate decision.

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The Bank of Canada has already raised the key rate by three percentage points during the year and raised the overnight rate to 3.25%. Desjardins’ team expects Bank of Canada Governor Tiff Macklem’s tough talk on inflation to force him to raise rates by another 75 basis points, bringing it to 4 percent.

“Governor Macklem knows he can’t go on like this forever,” Desjardins CEO and chief macro strategist Royce Mendes and ally Tiago Figueiredo wrote in an Oct. 21 memo, adding that an increase of this size is consistent with the bank. interest rate hike strategy.

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“But we expect the accompanying statement or press conference to at least implicitly acknowledge that future changes will not be as large,” they added. “They may even signal that the Fed will move in December to a more finely balanced, decision-by-decision approach that Macklem recently alluded to.”

However, if the bank decides to change gears and cool the rate of tightening, it will be guided by the relevant details expected in the monetary policy report accompanying the interest rate decision. According to Desjardins, the bank can only start making major changes in policy and communication when these new economic forecasts become clearer.

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When central banks around the world embark on the same task of raising interest rates, the drumbeat of global recession risks gets louder. It’s a growing risk that central bankers can no longer afford to ignore, Desjardins’ team said.

“Overall, central bankers are in uncharted territory, with many unknowns,” wrote Mendes and Figueiredo. “But we expect them to recognize both the likelihood of a recession and the likelihood that future rate hikes will be smaller. At this point, their whistling past the graveyard simply won’t fool anyone.”

The Big Six banks are also raising red flags, with the Royal Bank of Canada maintaining its expectations of a moderate recession in the first half of next year. RBC is not alone; The Bank of Nova Scotia echoed that sentiment with chief economist Jean-Fran├žois Perrault predicting a technical recession in 2023 and a terminal rate, or the bank’s likely maximum interest rate before the cut, of 4.25 per cent.

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The RBC Economics team, which also expects the central bank to succeed in its rate decision on Wednesday with a 50 basis point hike, also highlighted slowing economic growth. Nathan Janzen, deputy chief economist at RBC Economics, pointed to a 0.6 percent drop in hours worked in September and expressed a weakening sentiment in the Bank of Canada’s third-quarter business outlook survey, released Oct. 17. This latest survey revealed the sharpest drop in business sentiment in Canada since the start of the pandemic.

Rising interest rates have passed through the economy and weighed down demand and growth. Despite efforts to bring demand back into balance as supply tightens, the latest September inflation figure was hotter than expected at 6.9 percent year-on-year. Excluding food and energy, inflation accelerated to 5.4 percent on an annual basis, compared to 5.3 percent a year earlier.

This latest data point increased some economists’ odds of another outsized 75 basis point hike. To contain this inflation, Canada may have to contend with several quarters of slowing growth.

“But inflation is unlikely to fully and sustainably return to the central bank’s target range of two to three percent until the economy slows further,” Janzen said on Oct. 21. “This keeps the monetary policy makers firmly focused on raising interest rates, even though the growth prospects are weakening.”



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