Shrutee Sarkar

BENGALURU – According to economists surveyed for Reuters, the Bank of Canada will raise its interest rates by 25 basis point on March 2, before previously believed and before the U.S. Federal Reserve. The poll also revealed that there are higher expectations of rates rising by year end than initially thought.

Economists had predicted that the BoC would hold off until the end of the quarter before raising rates. They were prompted to change their expectations by persistently high inflation that reached a peak of 30 years in January.

In March, other major central banks such as the Fed or the Bank of England will likely raise their rates to address inflation. Economists are calling for aggressive moves of 50 basis points by the Fed.

This poll was done between February 17 and 23, with a 20 percent median probability for a rate hike of 50 basis points at the BoC meeting in March. However, all 25 economists forecasted a 25 basis point increase to 0.50%.

Andrew Kelvin (chief Canada strategist, TD Securities) stated that they are not ahead of the curve as inflation expectations have been well-anchored. This is probably the most effective way to frame it. They must increase rates as soon as possible, or they will fall behind.

GRAPHIC: Bank of Canada monetary policy outlook – https://fingfx.thomsonreuters.com/gfx/polling/gkplgamrxvb/Reuters%20Poll%20-%20BoC%20monetary%20policy%20outlook.png

Timothy Lane, BoC deputy governor, stated last week that there was an increased risk of inflation. He also said that it would not be easy for the central bank to tackle this problem. It would open the door to a potential aggressive campaign for interest rate increases.

The poll’s median forecasts showed that the BoC would increase its key interest rates by 50 basis points next quarter to 1.00%. At the end of the year, the rate will be 1.25%. This is higher than the January poll end-of-year predictions of 1.00% but less than the current market expectations.

According to the median forecast, the central banks would increase interest rates by 50 basis point in the second quarter. Then it would hike them by 25 basis points the following quarter. However economists had different views.

One in 24 economists forecasted a rate increase of 25 basis points for the second quarter. The rest anticipated rates increasing by at most 50 bps. The third quarter saw the same percentage of economists predict that rates will rise to 1.00%, seven forecast rates reaching 1.25%, and six predicted 1.50%.

Although the median fourth-quarter rate showed rates at 1.25 percent, 11 out of 24 respondents stated rates would reach at least 1.50%. The other one said 2.0%.

Each of the 14 economists that answered an extra question stated the bank would reduce its balance sheets this year. A majority said it in April. Others were divided between June and March.

The BoC, which holds approximately 42% of Canada’s sovereign debt, has not attempted to reduce its balance sheet like the Fed. This is known as quantitative tightening, or QT.

Tony Stillo (director of Canada Economics at Oxford Economics) stated, “The Bank will start QT shortly after its initial rate hike in March and begin to shrink its balance sheet.

Close to 55%, seven respondents (13 of them) answered another question and said that inflation wouldn’t fall below the BoC’s target of 2% until the second quarter of next year. Six respondents said that it will in the first quarter of 2023.

According to additional questions, respondents also predicted that this would be a very short cycle of interest rates. They put the terminal rate as well as their neutral rate at 2.00%.

“The tightening cycles is fast approaching, and markets expect an increase in front-loaded rate increases. Dominique Lapointe (economist at Laurentian Bank) said that household and corporate imbalances are still high.

We believe that this, together with expected risk aversion as well as tighter financial conditions will keep the BoC (and other central banks) from increasing as much as is currently predicted by the market.

(For more stories, see the Reuters economic poll:

Reporting and polling done by Shrutee Skar, Bengaluru. Editing by Ross Finley & Matthew Lewis.