The Canadian economy is recovering faster than expected, and inflation is running hot. As a result, the Bank of Canada (BoC) is expected to hike rates and end QE more quickly than previously thought. Here’s the accelerated timeline two of Canada’s “Big Six” banks see.
RBC Forecasts Rate Hikes By Next Year, QE Ending This Year
RBC sees not just one, but two rate hikes by the end of next year. The bank has forecast the overnight rate gets a 25 bps hike in Q3 2022. They see it being followed by another one of a similar size, bringing the rate to 0.75% by year-end. It may not sound very large, but it’s a 200% increase. Debt will still be cheap overall, but the intention is to help cool inflation which is expected to run hot.
More immediately, QE is expected to taper off as early as this year. RBC sees another taper by the second half, following last month’s taper. By the end of the year, the BoC is expected to only engage in reinvestment. Their share of Government of Canada bonds would drop below 50% by late 2021 in this case. This would lower rate suppression, allowing a gradual cooling of credit.
BMO Is Forecasting QE Ends This Year, and Rate Hikes In 2023
BMO expects the BoC to hike rates earlier than they planned, but later than RBC has forecasted. Economic slack should be absorbed in the second half of 2022, according to the BoC’s latest guidance. BMO sees the first hike happening in January 2023, following the inflation goal. Subsequent rate hikes are expected gradually every 6 months from there.
BMO also had a few opinions on the BoC tapering of QE later this year. They see April’s taper to $3 billion per week, to come down to $2 billion within the next 6 months. They see the program ending entirely by early next year. Once again, this would help longer-term lending rates rise to more natural levels, even before a rate hike.
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