Bank of Canada and US Fed Interest Rate Forecast Gets An Upward Revision At BMO

Canada’s oldest bank is hiking its expectations for policy rates in both Canada and the US on this week’s data. BMO Capital markets made an upward revision to its already significant forecast for central bank policy rates. The upgrade comes after stronger-than-expected data and stubborn inflation that’s still climbing, supporting the belief they’ll front-load rate hikes. 

BMO Sees Even Higher Interest Rates This Year

The bank hiked their forecast this week for both Canada and the US by 25 basis points (bps) by the end of year. That brings the Bank of Canada (BoC) policy rate to a forecast of 3.75% by year-end, and the US to somewhere between 3.75% and 4.00%. They don’t see it moving at all next year, as they believe central banks will pause to see the impact.

Stronger Than Expected, Stubborn Inflation Support Higher Rates

Changes in the outlook were attributed to stronger-than-expected data and stubborn inflation. Both central banks have recently explained the respective economies are functioning beyond capacity. Low unemployment and strong wage growth supports higher interest rates, reaffirmed in separate speeches. 

Higher interest rates might cost consumers more and result in a slowdown, but high inflation is much worse. “… despite relief for headline inflation from lower petroleum prices, still stubbornly high core inflation and wage growth trends,” said Michael Gregory, BMO’s deputy chief economist. 

Core inflation is the central bank’s preferred measure, reducing the impact of volatile components in the reading. Earlier this week, the BoC expressed concerns that core inflation was still rising, despite headline falling. This means inflation is still worsening, and becoming more broad. 

Economy To Stall But Avoid A Recession This Year 

Gregory expects the economy to grind to a halt, but avoid a recession for at least the rest of the year. “As cumulative policy tightening increases, we look for real GDP growth to stall through the turn of the year on both sides of the border, but (now more tenuously) still manage to avoid a full-blown recession,” he said. 

It’s worth emphasizing that avoiding a recession this year doesn’t mean one isn’t coming at all. It means one isn’t expected this year. Next year’s a totally different story.

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  • Blue 2 years ago

    Word is the BoC governor is not answering calls from his friends in the Real Estate cartel…Must give an idea about how bad it is 😄

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