The Bank of Canada spent almost 20 years without raising its benchmark interest rate by half a point. Now, in less than two months, it has been continuously with movements of this magnitude as it tries to fight inflation. But as for a great fixed-income expert, Canadians should prepare for an even more aggressive monetary tightening in the coming months.
“What was not expected (Wednesday) was the Bank of Canada’s falconry. Which, you know, is actually a prelude to a 75 basis point rise in our minds,” Earl said. Davis, head of BMO Global Asset Management. fixed income and money markets, in an interview. There are 100 basis points in one percentage point.
“Seventy-five basis points the next move, and possibly another 75, so they will have rates of up to 2.75 to three percent in September.”
The overflow of such movements for the Canadian economy could be profound at a time when real estate markets are already cooling after the Bank of Canada began raising interest rates in March, and with some households face off without much financial safety net. A recent Leger poll for BNN Bloomberg and RATESDOTCA suggested that 55% of Canadian homeowners would have trouble covering more than $ 200 in additional monthly costs.
On Wednesday, the Bank of Canada raised the prospect of even larger rate hikes, when it raised its one-day rate target to 1.5 per cent from 1.0 per cent and stated that it is “ready to act more forcefully if necessary to comply.” its commitment to reach the two percent inflation target. “
Davis is not the only one to predict that the bank could prepare to raise rates by three-quarters of a point. BofA Global Research strategists said in a report to clients on Wednesday that they believe there is a “very real possibility” of such a move.
Inflation has not approached the two percent target in more than a year as ongoing supply chain blockages, rising oil prices and the invasion of Ukraine by Russia contributes to a cost of living that is at its peak of several decades. Most recently, Statistics Canada’s consumer price index rose 6.8% year-on-year in April, reaching its highest level since January 1991.
Davis said anticipated load rate hikes by moving more aggressively will give the Bank of Canada more flexibility. However, with inflation well ahead of target, he is wary of the bank’s ability to control price pressure soon.
“That’s the million-dollar question (whether the bank is, or will be, controlling inflation). They’re doing what they have to do. My personal confidence level isn’t that high, because they’re well below inflation (with reference rate). ” He said.
Davis added that he believes that at best inflation will return to the two percent target in the fourth quarter of 2023.
“They have to come to a hardening mode … and what a hardening means is above the neutral rate, and the Bank of Canada itself said that the neutral rates, the high range is three per cent. So they won’t go over that until [the first quarter] 2023. And then I think you’re starting to see the impacts of inflation between two and three percent. “