Improved Economy, and Higher Inflation May Force The BoC To Hike Early: NBC

The Canadian economy is recovering so fast, the central bank may soon have to hike rates to cool it down. That’s the take from the National Bank of Canada (NBC), who accelerated their forecast timeline today. They expect output gap closure by the middle of next year, as well as inflation running hot. Rising inflation is expected to force the central bank’s hand, resulting in a hike by the end of next year. Previously the next hike of the overnight rate wasn’t forecast until 2023.

BoC Forecast To Hike Interest Rates By Next Year

NBC moved up their forecast for interest rate hikes in Canada. The bank now sees the overnight rate rising by 25 bps in Q4 2021, bringing it to 0.50%. Another two 25 bps hikes are expected over the two quarters to follow. The bank even thinks there’s a possibility of the hike occurring even sooner.

Source: NBC.

Economy Recovering Much Faster Than Expected

NBC accelerated its forecast after the Bank of Canada (BoC) last updated the public. In April, the central bank said they expect output gap closure in the second half of 2022. Previously this wasn’t expected until well into 2023. Economic recovery is happening a lot faster than expected.

“In response, we’ve brought forward the first BoC hike in our rates forecast to October 2022,” said NBC.

Inflation May Push Rate Hikes Even Earlier

The economy is improving so quickly, the country is now viewing inflationary risk. While the BoC maintains the higher inflation will be transitory, NBC disagrees. The bank expects inflationary pressures to be more permanent than previously thought. This runs the risk of causing the BoC to hike rates even more quickly.

“If anything, we’d now view a July 2022 rate hike as more likely than them waiting until 2023” said NBC. 

Earlier this month, another economist from NBC questioned the BoC’s statements on inflation. Diving through the data, they found inflation is not being influenced by a base effect, as per the BoC’s opinion. Instead, this is actual inflation that may have a long lasting impact. The opinion was also shared at another bank, who also feels higher inflation is not transitory, like the central bank keeps repeating.

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  • Tom Wolfe 3 years ago

    The economy is recovering so fast…retail, restaurants, and commercial real estate are dead, travel and tourism are dead, housing has never been more out of sync with incomes, high unemployment, the price of gas, butter, everything…but the economy is recovering so fast.

    Like mistaking the last shudders is life as a sign of recovery.

    ‘I’m not dead yet’ MPFC

  • Kolf 3 years ago

    The economy is not improving. Where in your lives do you see the economy improving. Inflation is going up like crazy because they printed tons of money. It generally takes approx 1 yr between printing of money to inflation starting to be noticeable.
    Even if rates increase it will not decrease housing price because inflation is so high. Interest will have to go above at least 8% before we can see prices fall. At which point the economy would be dead.

    Dont expect housing prices to fall when high inflation and money printing is charging at us full speed. Yes we need to lower prices in places like Toronto and Vancouver but thats not going to happen due to a slight increase in interest given inflation expectations and amount of money printed in the past globally.

    • Old Greg 3 years ago

      I betcha we head into stagflation and as rates go up and inflation is ramping up and as Real Estate is tied to interest rates as your obviously are aware… If rates go up 1% I believe inventory skyrockets and many homes go into default because the average household is leveraged to the moon..

      • WS 3 years ago

        You are right in fact we are in a state of stagflation already.
        Inflation is evident and yet the output gap is not narrowing-hence stagflation.
        Purchasing power is eroding so quickly that even if they suppress interest rates those who are leveraged will have to decide if they pay the mortgage or the car payment, or stop buying groceries.
        Of course they will default on the car loan first. But eventually the debt runaway will end and off the cliff they go.

  • Old Greg 3 years ago

    Inflation pulls rates up, we are in unchartered water… We are in negative real interest rates, this equals a commodity boom! Your dollars are going to tank and the inflation is going to tax the population who don’t understand how it is eroding their purchasing power, buy Gold Silver and miners to protect your purchasing power… DUH

  • JEFF13 3 years ago

    Ok sure a debt-based recovery with debt that produces almost nothing of value…just real estate inflation. Nothing better to produce stagflation than printing money and making unproductive investments.

  • Abc 3 years ago

    I am here for the comments. Where’s Holton at?

  • Axel McLion 3 years ago

    If the inflation is not transitory… that means faith in the currency is being undermined and the top 1% are spending more, or that the government is printing exponentially more which would likely cause the former to happen anyways. Right?

    So, are we finally at or near that point?

    And what social changes will come with the financial changes? (War? Dictatorship? Mass murder?)

    Scary times. The majority may never realize what’s happening as they became too complacent over the last could centuries. The rest of us may rack our brains over it but still fail to be prepared as it’s so hard to predict the future.

    I’m still hoping the inflation is transitory, but I seem to be perpetually wrong in hoping for deflation. Either it’s never going to happen because (as many people say) it’s too big to fail and politically easiest to keep kicking the can down the road, or its going to happen right after I give up and position myself for the opposite.

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