Rain or shine, Canada’s largest bank sees much higher interest rates to combat destabilizing inflation. RBC hiked its forecast for interest rates today after the central bank increased its neutral rate forecast. By year-end, the bank sees the highest interest rates since the 2000s.
Bank of Canada Raised Its Neutral Rate… Again
The Bank of Canada (BoC) raised its neutral rate again last month, meaning higher rates might be needed. The neutral policy rate is when the overnight rate provides neither monetary stimulus nor restricts the economy’s credit. In the April Monetary Policy Report, the central bank had forecast it between 2% and 3%. RBC says this is 0.25 basis points (bps) higher than the previous forecast. The longer it takes to cool inflation and get to the neutral rate, the higher it can climb.
RBC Raises Canadian Interest Rate Forecast, Sees Overnight At 2.5% This Year
In response, RBC is once again raising its interest rate forecast. After the 50 bps hike in April, the biggest since 2000, they expect another 50 bps each at the June and July meetings. The two meetings afterward are expected to get a 25 bps hike, respectively.
Before the end of the year, the bank sees the overnight rate hitting 2.5% — the highest since the Global Financial Crisis. That would be smack dab in the middle of the neutral range, a full 75 bps higher than pre-March 2020. That will be the end of an era for extremely low rates and low inflation.
Global Economy To Slow and Force Rate Hikes To Pause
The BOC warned they might have to go above the neutral rate, but RBC isn’t counting on it. They’re forecasting the central bank will see inflation come down and the economy slow, causing them to hit pause.
“… we think slowing growth and inflation will keep the BoC on the sidelines, holding its policy rate steady through 2023,” said Josh Nye, a senior economist at RBC.
Nye sees a similar trend of slowing global growth impacting central banks worldwide. Consequently, they currently see no hikes in 2023 or 2024 — all of the inflation-fighting power will be front-loaded. The BoC now forecasts inflation won’t return to the target until at least 2024. Elevated inflation means they’re also unlikely to cut rates unless the slowdown looks catastrophic.