Bank of Canada Waited Too Long, Expect MUCH Higher Interest Rates: Scotiabank

One of Canada’s largest banks just made the most aggressive interest rate forecast yet. Scotiabank now sees the Bank of Canada (BoC) overnight rate hitting 3.0% by next year. The bank acknowledges it’s an aggressive call, but it’s needed to control inflation. They feel the BoC kept rates too low for too long, and now needs to play catch up. 

Bank of Canada Overnight Rate Forecast To Hit 3%

Canadian interest rates are forecast to soar over the next few months. The bank sees the overnight rate hitting 2.5% by the end of 2022 and rising another 50 basis points (bps) in Q1 2023. It would be the highest overnight rate since before the Great Recession, with an overnight rate at 3.0%. That’s an extremely sharp increase.

“We think the BoC is falling farther and farther behind the curve. As a result, we now predict that it will raise its policy rate by an additional 2 percentage points this year, ending the year at 2.5%,” said Jean-François Perrault, the bank’s chief economist.

Canada’s Inflation Was Already High Before Recent Inflation Surge

The bank argues Canadian inflation hitting a 30-year high warrants an aggressive stance. Yes, the Ukraine conflict is adding additional pressure to higher rates. However, CPI had already hit a 30-year high back in January — before the conflict began.

Scotiabank also points to elevated inflation expectations in the CFIB February Business Barometer. The survey of business owners shows they expect costs will rise an average of 4.5% over the next 12-month. That’s more than double the BoC target rate of 2% and another sign businesses believe the central bank has lost the ability to control inflation.

More importantly, the CFIB survey captures the pre-conflict sentiment. Expectations have likely climbed since, and the BoC will have to send a message. Higher rates to curb whatever inflation they can. It’s not often the risk of inflation curbing consumption is higher than the risk of rising rates doing it.

Canada’s Economy Is Primed For A Higher Terminal Rate of Interest

The combination of factors will support a much higher terminal rate than the BoC sees. A terminal rate is the level where it supports full employment with stable inflation. When rates are below the terminal rate, they’re providing economic stimulus. Above the terminal and the economy will contract.

Scotiabank is calling a 3.0% terminal rate, which is much higher than the current forecasts. The BoC estimates the high range to be at 2.50%, meaning Scotiabank sees more persistent inflation.

“There is no doubt that this is an aggressive call in relation to the views held by others, but we believe the inflation outlook requires such a response,” said Perrault.

Scotiabank previously indicated they believe consumer inflation is much higher than stated. They even called it “fakeflation” at one point, hinting it has detached from reality. That would also indicate rates are way behind the interest rate curve.

20 Comments

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  • Ron Bruce 8 months ago

    I can see these increases in interest rates affecting the average Canadian, who are pulling the tax train. For those moving illicit money or money laundering, not a big deal.
    Does this mean Banks will pay savings account depositors more interest? Don’t hold your breath.

    • Doomcouver 8 months ago

      Not since Canada abolished reserve requirements in 1992. Now banks don’t need your money, they get to print their own without limits.

    • Julian 8 months ago

      Hahaha. If the BoC raises rates 2.75% the economy will implode, my bet would be a full blown depression. Of course they’d never go that far and just live with inflation when stagflation begins to settle in. What are these bankers smoking? The number of reason I could rattle off why this is terrible idea, could fill the Sky Dome. I recently saw an article of what interest rate rises a series of economists expected, average was below 1.0%.

    • Helena 8 months ago

      I feel sorry for new house buyers…

  • Lou 8 months ago

    Thank you for this article. Not so fast though when I read Mr. Perrault’s observation about CPI and inflation with raised GPD it is very good point but I see no remark about the QE measures that BOC took and that would need to be re-inject. Fakeflation or not I believe the BOC needs to revert those government bonds buy back. –Wasn’t this buy back stimulus supposed to be temporary until the market needs no more stimulus? If the market is good enough to stop stimulus and raise bps then aren’t those QE buyback also need to return to the market? I m not certain but if my observation is right then I further think the buy backs should have been returned even before raising bps but certainly at least they should be re-inject before the end of this year. This factor may encompass why there is a difference between the BOC previsions of 2.5% and Mr. Perreault of 3.0%. My current estimate is 2.75% this year. But maybe 3% early next year ..with more later

  • questions guy 8 months ago

    bold for the sake of being bold… doesn’t hurt to try I guess?

  • cto 8 months ago

    What if the BoC follows the weak path and lets inflation go,…because there is political pressure to save the over leveraged?
    Anyone like to comment on this?

    • Trader Jim 8 months ago

      Higher inflation:
      – erodes buying power requiring more money for the same goods
      – the extra money to pay for essentials are diverted from other goods
      – the lost goods is permanently lost revenue streams for other businesses
      – the revenue that was used to pay wages means layoffs
      – no foreign investment in businesses because their capital is immediately diluted to pay the higher inflation rate

      Basically high inflation is the worst possible outcome, which the BOC thought was a credible path to go like they did in the early 80s which creates an inflationary spiral that challenges the reason to invest in Canada at all.

    • GTA Landlord 8 months ago

      Inflation at 2.5% or 3% is the weak path. This is the Canadian dollar losing half its value every 11 years. I’m not saying the Bank of Canada is smart, but they would have to be pretty dumb to lose the ability to have Canadian dollars considered a stable currency to preserve home prices.

      • Ron Jeremy 8 months ago

        Why preserve home prices? Why not just let home prices remain stagnate? The ‘forever increasing home price’ is a relatively new scam required for the ‘inflationary economies’ of western nations to function.

  • razz 8 months ago

    Is the current the BoC lending rate of 0.5% the same as the over-night rate they are predicting to hit 2.5% end of the year?

    • Marc 8 months ago

      There’s three key rates: overnight; bank; and deposit. The overnight is the one used for loan interest, and the deposit rate happens to be the same. It isn’t always the same though, so that’s why they’re differentiated. More prudently managed economies would manipulate the three independently to achieve a desired outcome.

  • wendy 8 months ago

    The banks err – we pay for their mistake.

  • Scott 8 months ago

    “You’ll forgive me if I don’t think about monetary policy, I think about families.”

    • Patiently Waiting 8 months ago

      And still he was re-elected. Unbelievable!

  • Average Man 8 months ago

    As someone who missed the boat on buying a home, but now has zero debt, good. SEND THOSE RATES TO THE SKY! THE… SKY. Make savings accounts worth something again.

    • FlipG 8 months ago

      Average Man I second your emotion.

      Most Canadians who own homes bought them in the good old days when a home was something you lived in; not a skanky over-blown investment subsidized by renters and corrupt vote buying Politicians.

    • Ron Jeremy 8 months ago

      Uhh, no, you will not see a meaningful savings account interest rate because Canada did away with reserve restrictions a couple/few decades ago. This means the banks no longer need your cash because they can digitally print $$$ as they please.

  • John 8 months ago

    The BOC is doing what the Liberal government is pressuring it to do .. keep interest rates low. And by doing so they are knowingly inflating away their massive debt on the backs of the elderly and those without pensions indexed to inflation .. mostly elderly private sector retirees. Absolutely shameful! This is why the BOC has fallen so far behind in raising interest rates, which, based on historical actions to deal with inflation, should already be 3%. The Bank of Nova Scotia is right, the BOC is way too late in raising interest rates.

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