RBC Sees Bank of Canada Raising Rates Earlier Than Current Guidance

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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  • Trader Jim 3 years ago

    Bond yields are screaming higher inflation. Not liking how CAD looks when the US eases policy months ahead of Canada, with higher forecasted growth. That’s going to be a huge pressure on rates right there.

    • Ethan Wu 3 years ago

      NIM compression. Borrowing rates need to hike regardless of what the BOC does. This is the definition of a run away train.

      • Will 3 years ago

        Sorry to be that guy, but what’s NIM? I googled it and couldn’t find anything.

        • The Truth Shall Set You Free 3 years ago

          Net Interest Margin (NIM) is a measurement comparing the net interest income a financial firm generates from credit products like loans and mortgages vs interest it pays holders of savings accounts and certificates of deposit.

  • Tia Wolfe 3 years ago

    Weirdest recession ever. Same observations are cropping up everywhere. They printed money like it was the depression, for a routine recession that seems worse due to restricted activity. Now a real economy is the threat to the world.

    “Rising Mortgage Rates Could Erase Home Buyers’ Increased Spending Power”


    • Diggin In the crates 3 years ago

      Rates are only one piece of the puzzle. Real inflation, not the garbage CPI that they feed us, is up like crazy. Just look at the cost of every day things like gas, groceries, utilities, building materials etc…. Plus wages are not rising to keep. So what to people do? They dig further into debt to fill the income gap. You’re getting hit from all sides.

  • Darren Hampson 3 years ago

    Remember guys there’s nominal rates and real rates. You take the nominal rate .25 minus inflation rate say 2 percent and you get -1.75 real rate so that explains all the borrowing! You pay off debt with cheaper dollars! Your getting paid to borrow! Mind blowing hey!

    • Bruno 3 years ago

      That’s true for the bank. You don’t get to borrow from the central bank at that rate, so your effective rate is closer to +0.5 points in real terms. That bank is being paid to lender you money. You aren’t getting paid to borrow.

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