The Bank of Canada spent almost 20 years without raising its base rate by half a point. Now, in less than two months, he is backing down with moves of this magnitude as he tries to fight inflation. But as a leading expert on fixed income, Canadians need to prepare for an even more aggressive monetary tightening in the coming months.
“What was not expected (Wednesday) was the hawk of the Bank of Canada. Which, in fact, you know, is a prelude to an increase of 75 basis points in our minds, “said Earl Davis, head of BMO Global Asset Management’s fixed income and money markets, in an interview. There are 100 basis points in percentage points.
“The next move is seventy-five basis points and probably another 75, so they will receive interest rates of 2.75 to 3 percent by September.”
The spread of such moves to the Canadian economy could be deep at a time when red-hot housing markets are cooling after the Bank of Canada began raising interest rates in March, and some households are doing without a large financial safety net. A recent Leger survey for BNN Bloomberg and RATESDOTCA suggests that 55% of homeowners in Canada will struggle to cover more than $ 200 in additional monthly expenses.
The prospect of an even higher interest rate was put on the table by the Bank of Canada on Wednesday when it raised its overnight interest rate target to 1.5% from 1.0% and said it was “ready to act harder , if necessary, in order to achieve its commitment to the 2% inflation target. “
Davis is not alone in predicting that the bank may be preparing to raise interest rates by three quarters. Strategists from BofA Global Research said in a report to clients on Wednesday that they believe there is a “very real possibility” of such a move.
Inflation has not been close to the 2 percent target for more than a year, as ongoing supply chain difficulties, rising oil prices and Russia’s invasion of Ukraine contribute to the cost of living, which has been at its highest level in decades. . Most recently, Statistics Canada’s consumer price index jumped 6.8% year on year in April, reaching its highest level since January 1991.
Davis said raising interest rates on front-loading through more aggressive traffic will eventually give Bank of Canada more flexibility. However, as inflation goes so far from the target, he is wary of the bank’s ability to control price pressures soon.
“It’s a question of millions of dollars (whether the bank controls or will control inflation). They do what they have to do. My personal level of confidence is not so high because they are much below inflation (with the reference rate), “he said.
Davis added that he believes the best-case scenario will return inflation to the 2 percent target in the fourth quarter of 2023.
“They have to reach a tightening regime … and what tightening means is above the neutral interest rate, and the Bank of Canada itself said that the neutral interest rates are that the high class is three percent. So they won’t exceed that until [the first quarter] from 2023. And then I think you’re starting to see the impact of inflation to get between two and three percent. “
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