The Bank of Canada May Need 8 Rate Hikes To Combat Inflation: Scotiabank

Canadians might see much higher borrowing rates in the not-so-distant future. Scotiabank chief economist Jean-François Perrault has forecast up to 8 rate hikes within 2 years. He sees elevated inflation backing the Bank of Canada (BoC) into a corner on the issue. Inflation appears to be a lot less transitory than thought. If that’s the case, the central bank will be forced to move, and address the highest inflation rate in decades.

Canadian Interest Rates Forecast To Rise 200 Basis Points

The bank’s economists are calling a very sharp climb for Canadian interest rates. They have forecast an increase of 100 basis points (bps) in the second half of 2022. It would be followed by another increase of 100 bps in 2023. An overnight rate of 2.25% would be the highest Canadians have seen since 2008. 

A “full hike” is often considered 25 bps, which means this can translate into 8 hikes. Since they only see this beginning in the second half of next year, that’s up to 8 hikes in 6 quarters. It’s a bold call for a bank not exactly known for making aggressive calls.

Inflation Is Forcing The Bank of Canada To Respond

The aggressive hikes aren’t to address soaring home prices or aggressive credit growth. It’s due to inflation. High inflation gives a central bank few options outside of a rate hike. Unlike hiking rates to address home prices, it can’t just be delayed at the expense of a single generation. High inflation erodes national wealth, and threatens the credibility of the currency.

“We still view the supply disruptions as temporary, but they are clearly more persistent,” wrote Perrault. Adding, “muddying the inflation outlook further is an increasingly blurry distinction between supply-related challenges and those posed by strong demand.” 

“Even if ocean shipping costs were to normalize, there is a shortage of transportation and warehouse workers to handle the volume of goods being shipped within and across countries.” 

Rates Can Climb Even Higher If Inflation Rises Further

The forecast, as ambitious as it is, doesn’t discount the overnight rate may need to climb even higher. “If inflation rises more rapidly than we expect, we may need to forecast an earlier tightening along with a potentially higher 2023 endpoint,” he said.  

The forecast might be tough to see from here, but the general trend is fairly common these days. Elevated inflation is now seen as less temporary, with the central bank out of touch with reality. Since prices are set by expectations, the BoC has stuck with repeating the narrative. That’s no longer working, with their own research showing fewer people believe them.

The longer it takes the BoC to acknowledge inflation isn’t transitory, the worse it will be. Desjardins said earlier this year, a delayed reaction means it needs to be stronger. This greatly increases the odds of a policy over (or under) reaction. It appears Scotiabank agrees, the BoC waited until it needed to push rates a lot higher, over a short period of time.

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  • Marc Price 3 years ago

    Hiking rates to 2008 levels only doesn’t make sense to people that don’t realize they let inflation run to 2003 levels. Like repeating inflation is transitory, this isn’t because they don’t understand what’s happening. They very much know what’s happening, and since inflation is a tax — they’re letting it burn away the debt they took out.

    • D 3 years ago

      If that’s the case then THEY are okay with destroying the Canadian dollar which has never once defaulted. THEY want to replace our currency with a digital token currency issued directly by the central bank and the only means of using it will be through your phone, oh and btw each token will have an expiration date so no saving for you unless you buy a bond. I hope this doesn’t happen but it might.

  • Old Greg 3 years ago

    So this is how it works… Inflations is created when you try and create a free lunch out of printing money… Why you would buy a house at all time highs with all time low interest rates, did people not see this coming a million miles away? I sold everything to the greater fools and went all in on commodities, it’s seriously a no brainer people… It’s OK to think for yourselves although its really hard when you have central bankers spoon feeding the public dog shit!

  • vnm 3 years ago

    Sounds like when BNS told it’s customers they were richer than they thought they were, they actually believed it.

  • Trader Jim 3 years ago

    Let’s get to 1 hike and see how we’re doing. I get the feeling the Canadian economy might start to stumble after just removing QE.

  • Flipg 3 years ago

    The Canadian Economy is a Nightmare. Lockdowns & Cerb combined with Financial Repression will continue to maul the Middle Class for years to come.

    Oil and Gas are being trampled. Say goodbye to Alberta, the previous economic engine of Canada.

    What’s on the radar? Austerity for the Masses. Meanwhile, while Us Little People are walking to work and shivering in under heated homes, Private Jets and Rocketships of Those Who Got Us Into This Mess will continue to pump more carbon into the atmosphere than entire nations.

  • Rahul 3 years ago

    Let them raise it, by the time they are on to their fourth hike, I think they will panic and see that the economy is negatively affected and will either hold the rates steady or even reduce the rate. I don’t think they will do 8 rate hikes by end of 2023. Inflation will likely stabilize around 2% by beginning of 2023.

  • D 3 years ago

    These people never get anything right or are deliberately spreading misinformation so they profit. Probably the latter.

  • Sajjad 3 years ago

    I think, current “Inflation” outlook won’t be persistent due to the fact that it is tied to low Labour Participation rate and Supply Shock. Both of the reasons are transient in nature .. once Govt. support is lifted , you will see a boost in labour Participation rate.

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