Mumal Rathore

BENGALURU, Reuters – Bank of Canada is expected to raise interest rates in the third quarter of the year. This will be at least three months sooner than originally anticipated, according economists polled Reuters. There’s also a possibility that it could happen earlier.

Just last month, economists seemed almost equally divided on the possibility of higher rates. However, nearly all now believe that they will be increasing their risk sooner than later.

Forecasters from around the globe share this view shift, which is based upon rising inflation pressures, global supply chain bottlenecks and labour shortages, as well as increasing energy prices.

James Knightley is chief international economist for ING. “With global inflation pressures increasing, Canada’s activity story looks robust and the jobs market growing more rapidly than most countries, the odds favor earlier and more aggressive tightening of policy next year,” he said.

This view aligns with that of the central bank’s most recent Business Outlook Survey. It reported that firms anticipate stronger demand as COVID-19 is over, but there are supply restrictions which could limit sales and increase costs.

Canada’s inflation rate reached an 18-year record 4.4% in October. This was driven by rising gas prices and higher food prices. The BoC is under pressure to increase rates soon.

The median opinion of economists polled by Oct. 18-22 showed that the BoC will keep rates at 0.25% for the first half next year. However, they are likely to increase rates 25 basis points to 0.500% in the third quarter.

The first rise is being priced by financial market traders as soon as April.

The forecasts of economists about the rate at which rates will rise in Q3 are on the edge. The risk of their predictions was evident: 91% of the respondents (or 18 out of 20) said that a BoC change would occur sooner rather than later.

BIG DIFFERENCE

A smaller number of respondents indicated that the BoC would rise to 0.75% in the first quarter 2023 and 1.25% by the end of the year.

The poll indicates that the BoC could be significantly different from the U.S. Federal Reserve. They are expected to maintain rates at the same level through next year. [ECILT/US]

Stephen Brown, Capital Economics senior Canada economist, stated that the big difference is “that in Canada, employment has now returned to pre-pandemic levels, while in the U.S. it is not.”

The central bank expected inflation to stay above its target, and that it would rise to 4.1% in the current quarter. This is up from 3.1% three months ago. The central bank predicted that inflation would ease to 2.2% to 3.7% per quarter in the next year. The 2.5% forecast next year will be higher than the 2.2% prediction in July.

Benjamin Tal (deputy chief economist at CIBC Capital Markets) stated that the second wave in inflation, 2022, will be far more exciting. There will be both increasing wages and increased demand for money,” he said.

Tal said that semi-normal inflation to him would be riskier because it would be driven by demand. He expects both the Bank of Canada (BoC) and Fed to react to this.

This year was predicted to see a drop in growth. This year’s average export-driven economic growth would be 5.0%, which is a drastic drop from the 6.2% prediction three months earlier. It was unchanged in the last poll and expected to increase 4.0% next year.

According to poll results, the BoC will reduce its asset buying programme by C$1billon from C$2billion at its Oct. 27 meeting. This is when the bank will present its quarterly update regarding growth and inflation.