Fergal Smith

TORONTO, Reuters – Canadian bond markets are coming to terms with the expectation that the Bank of Canada will increase interest rates multiple times in 2022. One of these hikes could be this week. However, it would bring down price pressures and slow economic growth.

These changes in perception are reflected in moves in inflation breakeven, which is a market indicator of inflation expectations. The 10-year breakeven has fallen to 1.9% after reaching 2.3% in November. It was its highest point in data dating back to 2015.

In contrast, recent survey data https://www.reuters.com/world/americas/firms-see-increasing-labor-shortages-wage-pressures-bank-canada-survey-2022-01-17 from the Canadian central bank showed that expectations for price increases among consumers and businesses have climbed.

Businesses will have greater confidence in their ability to achieve their growth goals if inflation expectations are lower.

Andrew Kelvin of TD Securities, chief Canada strategist said, “This implies that inflation may be less likely to remain high in future years, with the market pricing within an aggressive Bank of Canada tightening cicl.”

Markets expect a 65% chance of Canada’s central banks raising its benchmark rate (currently 0.25%) in an announcement made Wednesday, despite the uncertainty caused by Omicron virus. It would be the first rate hike https://www.reuters.com/world/americas/even-omicron-slams-canada-bets-january-rate-hike-rise-2022-01-18 since October 2018.

Investors anticipate six more hikes this year. This would raise the policy rate to 1.75%, its level pre-pandemic. This is an increase from December’s four and two, respectively. Markets expect the Federal Reserve to raise its policy rate by another two.

Markets are urging the BoC’s tightening to happen as Canadian inflation has reached a record high of 4.8% in December. This is despite the fact that it threatens to exceed the 2% goal for longer. It also feeds expectations about future price rises.

The central bank may also be concerned by signs of an overheated Canadian housing sector. Data for December revealed that the median selling price of a house was almost 18% higher than a year ago.

‘PSYCHOLOGICAL WAR’

Economists believe that there is a chance of a decrease in supply-chain disruptions in the second half of this year, which could lower price pressures. Past increases in energy prices, however, will not be included in the inflation calculations over time.

Karl Schamotta is chief market strategist for Cambridge. “Central banks in Canada, the United States, and Canada are winning the psychological warfare, successfully convincing investors that it’s serious about fighting the inflation.” Global Payments (NYSE:).

Tiff Macklem (Bank of Canada Governor) stated that Canada’s economic slack due to the coronavirus epidemic has diminished substantially in December. It is an important sign that the central banking will increase rates quickly. Also, the Fed is becoming more hawkish.

Although both central banks are known to increase rates by 25 basis-point increments, they may move quicker.

The BoC will likely begin quantitative tightening (or QT) sometime after the initial hike. This is a reduction in the number of bonds it has on its balance sheets that were purchased during the pandemic.

A combination of rate increases and QT could have a negative impact on the economy, especially after Canadians borrowed more during the pandemic.

The third quarter 2021 quarter saw a rise in household credit market debt to C$2.6 trillion, which is roughly 177% of total income. This was 10% more than the fourth quarter 2019.

However, employment is now higher than it was before the pandemic and individuals have saved an incredible amount.

According to economists, the savings increase over pre-pandemic trends could amount to nearly C$300 trillion or 20% of annual expenditures.

Kelvin stated that tightening does not necessarily have to mean a difficult economic time. This means that in two years, the trend of high-growth will likely end.