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.
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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