Canada

Banks Forecast The BoC Will End QE This Year, And Hike Rates As Early As Next

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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15 Comments

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  • Democratic Socialist whatever that means 4 months ago

    When are we ending free pay cheques that I am paying for? Don’t mind if it’s to keep people afloat for short term, but over a year? In Bond markets, anything >1 yr is not short term anymore.

    • Ashley 4 months ago

      Free pay cheques will never end, they’ll just transition from Emergency Recovery to Universal Basic Income. The reward for hard work is nothing in Canada, better to spend time on thinking how to become eligible for pay cheques from govt.
      Works for both sides – people get paid for doing nothing, govt. gets votes for doing nothing.

  • Smug Canadians 4 months ago

    So, in other words, the US Fed is calling this behind closed doors. Our BoC Gov is not smart enough to make sound decisions on his own. Not that I would blame him. We pretty much have to follow as a rule.
    Get ready kids! The reckoning is coming!

    • Doomcouver 4 months ago

      Yeah I’ve repeatedly said that that BoC overstates how much actual control they have. They set interest rates within a very narrow margin of what rates the Federal Reserve is setting. Which means with Canadian debt as high as it is, the Federal Reserve effectively has the power to implode the Canadian economy.

      • Sam 4 months ago

        I’m clearly not as economically saavy as many BD readers.

        However, given the “Red Sky in the Morning, Sailor’s Warning” U.S Bond Inverted Yield Curve happened in 2019, it seems as if Central Banks are pushing every button and pulling every lever at their disposal to keep markets chugging along without recession. Kind of seems like the pandemic was great cover to launch into massive QE to support the economy and stave off the correction that was coming due to a prolonged addiction to low interest and high debt.

        Using the addiction analogy, this action may be a kind of permanent economic methadone treatment to keep the addict from running off the rails. Which would mean tapering and removing QE will result in the addict launching into heavy withdrawals. (inflation, recession etc)

        Using the Sailor analogy, all this intervention may have just put off the inevitable…or the future a lot worse than it needed to be.

        Am I out to lunch on this? Cause it really seems like housing and other markets can’t just go on forever with the status quo…there needs to be some sort of correction.

      • Jimmy 4 months ago

        Arguably US, China, UK could change dynamic? We keep hearing from the bulls that govt Canada won’t let rates move. This is very naive.

  • RateHawk 4 months ago

    WhYYY would a bank say rates are going higher? I wonder if it would be in their interest to see more people ‘take advantage’ of the current rates and then see their own actual borrowing costs drop in the future because they see negative rates on the horizon.

    • Rob Turner 4 months ago

      Borrowing costs don’t fall if inflation is rising. The bank’s job is to make sure they can continue to handle their own liabilities without losing money. They’re protected against profit, they aren’t protected against margin compression.

  • Rob 4 months ago

    Is the music ending ?
    Do we stop dancing ?

  • Kev 4 months ago

    So the BoC has lost it? Why? How so? They would be getting ahead and removing excess monetary supply and taking out the little inflation we have so far. This would look like the last US short rate hike cycle we just had. Housing of course would cool, but not come crashing down because the bank would just cut rates if unemployment picked up or GDP slows. Borrowers were prepared for this.
    Persistant inflation or inflation coming in higher and faster than expected would be different. I don’t think we are there yet. This just looks like Central Bank housekeeping after a pandemic.
    I’ll be watching the CPI’s if they get above 3% or the US 10yr GOV bond yields going above 2.5% for any shift.

    • Paul 4 months ago

      Little inflation? Have you been keeping up? I wouldn’t really accept that inflation is around 2%. I guess the average person won’t notice till their grocery bill goes up….wait a second…

      https://asianpacificpost.com/article/9094-food-prices-are-their-way-canada.html

      • Kev 4 months ago

        Thanks for the link Paul. I’ll change a “a little inflation” to “significant inflation” or “high inflation” . My comments still hold up. The CB’s will decide what Paul will accept and what the average person will pay.
        So what do you think CB’s will do?

      • kev 4 months ago

        Call it “ high inflation “ then. My comment still holds up. The central banks will decide what you will accept and what the average person will have to pay.
        The CB’s have limits to how much inflation to put on the economy, to much is bad thing.
        Thx for the link.

      • Kev 4 months ago

        Honestly Paul I’ve had a couple comments to you posted then promptly removed that were neither rude or disrespectful.
        Anyway thx for the link.

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