The Bank of Canada Will Raise Interest Rates Early, Can Hit 11x The Current Rate: BMO

Canada’s oldest bank is accelerating its forecast schedule for the central bank. BMO sees the first interest rate hike in April, after yesterday’s announcement from the Bank of Canada (BoC). That would be 3-months sooner than previously forecast, and the first hike is just the beginning. The forecast shows the overnight rate rising as much as eleven times its current level to cool inflation.

BMO Sees The Bank of Canada Hiking Rates 3-Months Early

BMO sees the BoC hiking interest rates sooner than previously expected. Now they expect the first rate hike to appear in April, 3-months ahead of schedule. April is also the first month the BoC has said they can raise the overnight rate. 

The bank expects rates to rise in line with the historical growth rate. They’ll increase by 0.25 basis point (bp) increments, often called a “full” hike. It’s consistent with the BoC rate hikes executed in 2010 and 2017. Once they get started, the hikes are forecast to continue for the next few years. 

Canadian Interest Rates Could Rise As High As 2.75 Percent

BMO sees the central bank moving sooner, but they don’t see subsequent hikes occurring very quickly. The forecast shows the overnight rate hitting 1.25 percent by the end of next year. That itself would make them 400% above current levels. One of the significant issues with low rates is, any increase tends to seem dramatic and have a substantial impact. Going from free money to paying a little is a big step.

Ultimately, the forecast shows Canada’s overnight rate can go a lot higher this cycle. BMO sees it peaking between 1.75 and 2.75 percentage points. That is beyond next year’s forecast though, so you have a few months before needing to worry about it. Let’s see how the initial rate hikes play out first.

Canada’s High Inflation Is Driving The Need For Higher Rates

One of the big reasons the bank chose to accelerate its schedule is the language the BoC used. BMO points to the notable drop of “transitory” and “temporary” in the latest release. It was a significant change in tone for the BoC. They had been trying to reassure people inflation was meager; the public just doesn’t get it. The US Federal Reserve blew up that narrative a week before.

The bank’s deputy chief economist also points to a few other boiling point issues. High home prices, supply bottlenecks, government spending, and inflation, to name a few. The BoC won’t be raising rates because the economy is booming. Most likely, this is due to overly easy policy, which doesn’t justify the need for such cheap credit. 

In contrast to other forecasts, BMO isn’t the most aggressive but far from the least optimistic. The National Bank of Canada (NBC) recently said a rate hike is needed in the first quarter to avoid jeopardizing the recovery. Desjardins only sees the overnight rate climbing to 0.75% by the end of next year. Scotiabank has forecast rate hikes in the second half of next year, a little later — but still ends the year at the same level. In any case, it’s hard to find an institution that doesn’t see interest rates rising by the end of next year.

16 Comments

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  • J_Morrow 12 months ago

    Good reminder to stock up on popcorn.

    • Trader Jim 12 months ago

      People forget that 14% interest rates didn’t blow up the economy. The need for the cost of interest tripling over a short period did.

      By dropping it down to 0.25% they don’t realize they rate intensity is just as high, and the longer they leave it at this level the stronger the impact.

    • Greg 12 months ago

      Is this Fox News Canada…? 11x….so 20% interest rates, not in any of our lives times.

      • Terrance Yu 11 months ago

        If you’re a product of Canada’s public education system, I’m glad my parents paid a little extra.

        11 x 0.25 = 0.25 + 0.25 + 0.25 + 0.25 + 0.25 + 0.25 + 0.25 + 0.25 + 0.25 + 0.25 + 0.25 = 2.75%

        One needs to multiply that to get to your estimate.

  • Matt 12 months ago

    You can tell this is a bubble by the number of Canadians that will read this and then think/say “Canada can’t raise rates. There are too many homeowners that would be negatively impacted.”

    Let’s stop calling it high inflation and call it what it is — the more rapid erosions of Canadian currency.

    • Whiskey Foxtrot 12 months ago

      Exactly the issue. I make a decent household income, but my house earns more than the people working inside of it. It’s a ludicrous proposition, and reckless for them to continue it.

  • Claire 12 months ago

    I just want to watch the whole long-term debt cycle implode.

  • D 12 months ago

    0.25 basis points seems awfully low

    • RW 12 months ago

      Triple-rate cut in a 30 day period. They “knew” how much credit was needed before anything happened, and now they’re definitely right it was the correct amount.

  • Doug Forkes 12 months ago

    Maybe, but misleading. An elevenfold increase in the overnight borrowing rate will not mean anything like an elevenfold increase in mortgage rates.

    • Trader Jim 12 months ago

      No one said it’s the same thing as mortgage rates rising 11x. It’s a credit related issue with mortgage rates. It’s a direct issue with throttling credit capacity.

      They’re wasting their fire power for an emergency right now because they’re worried “what if” something bad happens. Crushing young people and concentrating wealth, without factoring in that demand is at an all-time high.

  • Jappan Sing 12 months ago

    Ticklem doesn’t care.

  • Rene Albert 12 months ago

    I pity all those suckers who bought excessively priced residences at record low interest rates, because they didn’t want to miss the boat. Well the boat is already starting to show signs of leaks because it was entirely built on hype and greed…much like Nortel! Remember them???

  • Chris sky 12 months ago

    … they say.. but they won’t…

    And. Infact .. they didn’t yet.

    They will .. but not much and not for awhile .
    Low interest rates for next decade. But they’ll talk like theyr big increases

    • Jimbo 12 months ago

      The BOC said April would be the earliest they can hike. Rates at his level are driving out foreign investment. No jobs means we’re all going to have to sell houses to each other.

  • fred 11 months ago

    The policy of BOC and government is to pump up housing market to show growth , after a couple of .25 hike probably remove %2 stress test then pump up housing market again

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