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.