Get ready: Top Bay Streeter sees a huge increase in BoC rates – BNN Bloomberg

The Bank of Canada lasted for almost 20 years without raising its base interest rate by half a point. Now, in less than two months, she has returned to herself with movements of this magnitude as she tries to curb inflation. But as a top fixed income expert, Canadians should prepare for an even more aggressive monetary tightening in the coming months.

“What wasn’t expected (Wednesday) was the Hawk Bank of Canada. Which, in fact, you know, is a prelude to a 75-point increase in our minds,” said Earl Davis, head of BMO Global Asset Management. fixed income and money markets, in conversation. There are 100 basis points in percentage points.

“Next step is 75 basis points and maybe another 75, so by September they will get rates up to 2.75 to three percent.”

The spillover for the Canadian economy could be profound at a time when previously heated housing markets are cooling after Bank of Canada began raising interest rates in March, and some households do without a major financial safety net. A recent Leger survey for BNN Bloomberg and RATESDOTCA suggested that 55 percent of Canadian homeowners would have trouble covering more than $ 200 in additional monthly costs.

Bank of Canada put the prospect of an even greater rate hike on Wednesday when it raised its target for the overnight rate to 1.5 percent from 1.0 percent, saying it was “ready to act more forcefully if it is to meet its commitment to reach 2 percent inflation target. “

Davis is not alone in predicting that the bank could prepare to raise rates by three-quarters of a point. Strategists from BofA Global Research said in a report to clients on Wednesday that they thought there was a “very real possibility” of such a move.

Inflation has fallen far short of the 2% target in more than a year, as ongoing supply chain congestion, soaring oil prices and the Russian invasion of Ukraine are contributing to declining living costs. The last time the Statistics Canada consumer price index jumped 6.8 percent year on year in April, reaching its highest level since January 1991.

Davis said raising rates in advance with a more aggressive move will ultimately give the Bank of Canada more flexibility. Given that inflation is so far ahead of target, he is cautious about the bank’s ability to bring price pressure under control in the foreseeable future.

“That’s a million-dollar question (whether the bank has or will control inflation). They do what they have to. My personal confidence is not that high because they are well below inflation (with a benchmark).” He said.

Davis added that he thinks the best possible scenario will lead to a return of inflation to the 2% target in the fourth quarter of 2023.

“They have to get into a tightening regime … and what the tightening means is above the neutral rate, and the Bank of Canada itself said the neutral rate, the upper limit is three percent. So they won’t get over it until [the first quarter] of 2023. And then I think you’ll start to see the effects of inflation to get between two and three percent. “

WHAT THE OTHERS SAY

“I think [Davis is] a little aggressive, especially when I look at what’s going on south of the border. I think President (US Central Bank) Powell has already put on the table that they are focusing more on raising by 50 basis points. I think it would be a bit of a book or a school for Canada if she brought up a little more emphatically. “
-John Goldsmith, portfolio manager Montrusco Bolton

“The statement says officials could act ‘stronger’ if necessary, which clearly opens the door to a 75-bp move in the coming July announcement date. However, we do not think the data would justify such a move because the housing market is already responding.” negatively to higher rates. “
-Royce Mendes, Desjardins head of macro strategy

“Don’t expect the hawkish rhetoric to subside until inflation starts to fall. We continue to look for another 50 basis points increase in July, but there is a risk that we will move 75 basis points if inflation surprises again.”
-Benjamin Reitzes, Canadian exchange rate and macro strategist at BMO Capital Markets

“In fact, we suspect that the bank will decide to continue to increase further by 50 basis points, not least because we expect a further significant deterioration in housing market conditions.”
-Paul Ashworth, Chief Economist of Capital Economics for North America


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