Stock Groups

Bank of Canada 50-basis-point June 1 hike a done deal, economists say: Reuters poll -Breaking


© Reuters. FILE PHOTO – A sign was pictured at the Bank of Canada Building in Ottawa (Ontario, Canada), May 23, 2017. REUTERS/Chris Wattie/File Photograph

Shrutee Sarkar

BENGALURU (Reuters – The Bank of Canada is expected to raise its overnight interest rate by 50 basis point on June 1. This was according all thirty economists polled in Reuters. These economists see interest rates increasing at least a half-point by the end of this year than what they predicted just one month earlier.

It seems that the BoC will follow an aggressive course similar to the Federal Reserve’s to control soaring inflation. Inflation has soared to 6.8% in April, a record high for the past three decades. This is now more than one year after it surpassed the 1-3% limit of the central bank.

Tiff Macklem, the BoC Governor, stated that interest rates might need to rise above the neutral range (currently between 2% to 3%) for a time in order to bring inflation back on track.

According to the poll, all participants in the May 20-25 survey, they were expecting to raise their overnight rate by half a point at their June 1 meeting. This would bring its lending rate up to 1.50%. It was also in keeping with money markets pricing.

A month ago, economists predicted that June would see a 25-basis point increase. cf8ff7e6-0022-4765-aef6-2cedd974b6441

Reuters Poll: Canada monetary policy outlook:

Josh Nye from Royal Bank of Canada, senior economist said that although the BoC has its sights set on curbing inflation, the BoC will also be mindful of how the overnight rate affects the economy. “When the overnight rates are at a lower level the BoC will begin to consider the possibility of balancing the need for inflation control and the ability to return inflation promptly to the target while extending the economic cycle,” said Josh Nye.

We don’t think the BoC will restrict monetary policy, but it could if persistently high inflation makes it necessary to do so. This would increase recession risk.”

The smaller number of economists that answered the additional question about whether tightening would cause a recession were close to split. 7 of 14 of them said no, while the other 9 of them stated it would. 3b027676-eac9-431b-a886-40d58ab52c3e2

Reuters Poll- Canadian recession sentiment:

Canada’s economy will be especially sensitive to rising rates because Canadians borrowed heavily in the housing boom to take part in an exploding market.

The poll showed that 13 of the 30 respondents predicted rates rising to 2.25% during the third quarter. 10 others anticipated rates being 2.00% while six forecast rates at 2.50%. The economist who predicted rates at 1.75% for September ended up being the only one.

26 of 30 survey respondents predicted that rates would rise to 2.50% during the fourth quarter. This included six people predicting rates will reach 2.75%. Six others claimed rates will be at 3.0% by the end 2022. One rate predicted at 1.75% while four others expected it to be 2.255%.

According to poll medians, rates were expected to rise by 2.25% and 2.50% respectively in the third quarter. It was predicted that the BoC would raise rates to 2.75 percent in the first quarter 2023, and then remain neutral until at least the end of the year.

According to separate polls, inflation was forecast to reach 5.9% in this quarter and then ease to 5.0% or 4.4% the following two quarters. [ECILT/CA]

Although inflation is expected to drop significantly in the next year, it will still be above the target of central banks until at least 2024.

Right now, inflation is the BoC’s main concern. According to Christian Lawrence of Rabobank, a senior cross-asset strategist and economist at Rabobank, Governor Macklem suggested that the market would be satisfied with a 50-basis point hike in June. He also promised price stability “forcefully” if necessary.”

However, banks should not ignore the potential dangers associated with entering a recession. They can dampen demand to help slow inflation but that is all they have. In order to achieve equilibrium, spending needs to be moderated. Lawrence noted that inflation expectations rising are a concern.

(For additional stories about the Reuters global economy poll, click here