Canada’s Top Finance Experts See The Bank of Canada Aggressively Hiking Rates

Canada’s central bank is overwhelmingly expected to hike interest rates aggressively. We polled the country’s top finance experts for their overnight rate forecast. Nearly all expect the Bank of Canada (BoC) to hike rates tomorrow. They don’t see the rate hikes ending there, though. Over the next year, they see interest rates rising aggressively to curb inflation.

Canadian Overnight Rate Sentiment Index

The Canadian Overnight Rate Sentiment Index (CORSI) is our latest sentiment tool. We ask a panel containing some of the country’s top experts for their overnight rate forecast. We then take the results and anonymize the forecast. This helps them to forecast as they feel, without the bias of expectations. We then plot the results on a Cleveland-style dot plot to see where forecasts are concentrated.

Reading it is easy since we did all of the heavy lifting. Each dot on the chart is where an expert expects the overnight rate to be at the end of the BoC rate announcement. The more dots, the stronger the sentiment is for that forecast level. Large clusters, or virtually all plots, mean a unanimous movement. Small clusters, or stray plots, are under-appreciated forecasts, considered noise when reading.

Forecasts tend to widen the longer out they are. This is a feature of every forecasting tool. It’s harder to predict what happens next year than it is to predict what happens tomorrow. It doesn’t mean you can predict tomorrow, but it’s a little easier than a year later.

Why Not US Traditional Interest Rates Forecast Models?

Market forecasts are mostly based on bond yields. Great quantitative data, but we’ve seen more emotional management of the economy. We expect objective management, but that only works if we’re managed by algos. Since humans make the decisions, they might make decisions that aren’t objective.

That’s where a forecast from an expert close to the economy comes in. They can feel tensions that might not be easily quantified. Political pressures, geopolitical turmoil, etc.. might not be fully factored into the market. Some things are better captured by humans for reasons that aren’t easily explained.

The last BoC overnight rate announcement is a great example. The market showed a consensus of a rate hike for the Jan 26, 2022 meeting. However, the CORSI showed no expert has forecast that rate hike. Some even forecast a hike at their institution, but didn’t feel it when anonymized. Consequently, the index was one of the few indices to doubt a rate hike, and it turns out it was right.

Obviously no tool is perfect for forecasting and we’re not presenting this one that way either. We do think it’s an important tool that can be added to your arsenal, to enhance forecasts. 

Bank of Canada Is Expected To Hike Rates Aggressively This Year

Let’s break this down meeting by meeting.

Canadian Overnight Rate Sentiment Index (CORSI)

A Cleveland-style “dot plot” of expert forecasts for the Bank of Canada (BoC) overnight rate, as of March 1, 2022. 

Source: Better Dwelling. 

Mar 2, 2022 – All experts have forecast a rate hike of 25 basis points (bps) at this meeting. It was an easy call, since the central bank has been implying it will be the first hike. The large cluster of plots makes it clear the forecast will be 0.50% by tomorrow. It’s not always so clear going forward though.

Apr 13, 2022 – The bulk of experts have forecast another rate hike at this meeting. The overnight rate would rise another 25 bps if right, hitting 0.75% by the end of the meeting. Only one panel member didn’t see a rate hike, as the BoC plays a little catch-up on cooling inflation. 

Jul 13, 2022 – The forecasts are clustered around the 1.00% mark, implying another rate hike at this meeting. Two forecasts are below this level, but only one sees the overnight rate at 1.00% or higher. 

Sept 7, 2022 – The forecasts are split evenly between 1.00% and 1.25%, with only one below the 1.00% mark. Once again, the further out the forecast is, the more difficult it is to make a call, and the wider the range gets. It’s easier to tell what will happen tomorrow than next year. Unless it’s predicting if the Leafs will win the Stanley Cup, then it’s an easy call for any year that they probably won’t. 

Oct 26, 2022 – The October meeting is more definitive, with most forecasts agreeing on rates at 1.25%. Two experts are above and two below, but there’s more certainty at this level with 70% of forecasts above the 1.25% mark. 

Dec 7, 2022 – No one wants to ruin Christmas or the Santa Rally. The forecasts are still clustered mainly for the overnight rate at 1.25%. We can see expectations climbing though — with another forecast rising. 

Jan 25, 2022 – By Jan 25, another round of rate hikes is forecast. More than half the panel sees the overnight rate at 1.50% or higher. Two forecasts are even at 1.75%, the neutral policy rate implying no need for further stimulus. The 0.75% forecast completely disappears as well, as they up their expectations.

Takeaway: Experts see easy credit conditions, but tighter than most consumers are now used to. Over the past two years, rates have been very low to encourage credit growth and inflation. Higher interest rates tend to impact lending across the curve. As interest costs rise, more money is spent on servicing, and budgets shrink.

The mechanics are the exact opposite of those that accelerated home prices recently. This can mean slow, or no (gasp!) price growth as credit normalizes. Even with an aggressive climb, the overnight rate will still be relatively low. Over the next twelve months, only two experts in the panel see pre-2020 levels.

Panel Experts

Douglas Porter, Chief Economist, BMO 

Jimmy Jean, Chief Economist, Desjardins Group

Benjamin Tal, Deputy Chief EconomistCIBC

Taylor Schleich,  VP of Economics and Strategy, National Bank Financial

Prof Angelo Melino, Prof of Economics, University of Toronto

Moshe Lander, Prof of Economics, Concordia University

Tony Stillo, Director of Economics (Canada), Oxford Economics

Dan Eisner, Chief Executive Officer, True North Mortgage

Carl Gomez, Chief Economist & Head of Market Analytics, CoStar Group

10 Comments

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  • Trader JIm 6 months ago

    Nice, the Fed dot plot for Canada. Much needed, but Canada as a whole needs a lot more transparency and discussion about how interest rate hikes are done.

  • GTA Landlord 6 months ago

    Rough calculations show this reduces buying power around ~15% over the span of a year. Not a lot, but the question is will that be enough to break the mindset of perpetual returns?

    • Van YIMBY 6 months ago

      This is the point BMO has been making for a while. De-commodify housing by slowing returns compared to other assets and then see how much inventory exists. Until then you’re not forecasting how much housing is needed, but looking at how much housing is *wanted* m

    • Vishal 6 months ago

      But that doesn’t even correct the price gains last year. Not going to be affordable by any measure.

      • Hey I have a question for you sir 6 months ago

        My friend affordability is out of the question at this point we’re just trying to steer this market away from interstellar space and back into the solar system

  • David Tran 6 months ago

    This is “aggressive” only by Canadian standards. The US is forecast to blow past this by the end of the year, potentially doubling up on interest rate hikes.

    • Nassim 6 months ago

      New Zealand was hiking rates last summer while Canada complained it didn’t need to, because it thought high inflation was a misread. Absolute clown show.

  • SH 6 months ago

    The proposed 2-year ban on foreign buying is officially dead. The Liberals blocked THEIR OWN campaign promise in committee on Monday.

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