Canada’s largest bank believes higher rates are a lot closer than most are hoping for. RBC senior economist Josh Nye is forecasting the Bank of Canada (BoC) will hike rates sooner than expected. The forecast is based on higher inflation and a recovery ahead of schedule. The economist is watching for a gradual reduction in QE, which may start as early as next month.
Higher Inflation and The Economy Is Recovering Faster Than Expected
Nye sees both near-term, and longer run inflationary pressures contributing to higher rates. In the near, he notes “rising commodity prices, higher shipping costs, and input shortages are set to push goods inflation higher.” These are likely to be short-term, transitional issues.
On a longer timeline, he sees pent-up spending driving the cost of goods higher. Nye wrote, “a pile of savings could see demand recover faster than supply.” It’s expected to impact hard hit sectors like services the most.
The good news is this all chalks up to an economy that’s recovering way ahead of schedule. He adds, “we expect a return to full capacity in the US and Canadian economies will help sustain near – or even above – target inflation in 2022.”
Central Banks Likely To Hike Rates Next Year In First Half of 2022
If you were hoping for low rates to stick around for a few years, you might be disappointed. The faster than expected recovery, and hot inflation, is going to throw a kink in that plan. Nye notes, “some central banks will hike rates sooner than markets are anticipating.”
RBC is watching how central banks move over the next few weeks for confirmation. They expect the BoC to begin tapering asset purchases by next month. Tapering QE would be a strong sign they are getting ready to reduce accommodative policy.
The tapering won’t be an abrupt end to easy policy though. Nye sees it being a “very gradual process.” He expects “both the Fed and BoC raising rates modestly next year, earlier than their current guidance suggests.”
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