Oct 26, 2021
Bay Street split on timing of BoC's first post-COVID rate hike
, BNN Bloomberg
The rise in Canadian inflation isn’t transitory at all: Scotiabank head of Capital Markets Economics
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One week ago, Scotiabank Vice President and Head of Capital Markets Economics Derek Holt generated quite a bit of buzz when he predicted to BNN Bloomberg that the Bank of Canada will hike interest rates eight times before the end of 2023.
Ahead of Governor Tiff Macklem’s next central bank meeting Wednesday, it would seem not everyone on Bay Street shares Holt’s hawkish outlook.
BNN Bloomberg spoke with Bay Street economists about their thoughts on Holt’s call. Here’s what they had to say:
Earl Davis, head of fixed income and money markets at BMO Global Asset Management
When do you think the Bank of Canada should start raising rates?
Q1, 2022. Specifically either Jan. 26, 2022 or April 13, 2022 to align with the release of the Monetary Policy Report.
How many times do you think the Bank of Canada will raise rates before end of 2023?
I do not know how many times they will raise rates but they will raise rates by a total of 275bps to get the overnight rate to 3.00 per cent (above core inflation) by the end of 2023… there is the possibility that they raise interest rates by 50 or 75bps at one meeting (as the Bank of Canada is arguably behind the curve and the later they wait before hiking, the more behind the curve they become).
Do you think the average Canadian is prepared for the impact of higher rates?
It is not the level of interest rates that the average Canadian has to be prepared for (as the market rates are already preparing people for a higher rate outcome), it is the pace of rate rises that will impact Canadians. The later that the Bank of Canada waits before they start raising rates, the more dramatic the rate hikes will have to be and Canadians are not prepared for dramatic rate hikes (i.e. 50 or 75bp a meeting). We have eight BoC meetings in 2022 and eight BoC meetings in 2023 so they do have the opportunity to bring in 275 bps in hikes relatively gradually (11 meetings x 25bps).
Andrew Kelvin, chief Canada strategist at TD Securities
When do you think the Bank of Canada should start raising rates?
July. There is certainly an argument for lifting much earlier, but benefit of moving earlier is outweighed by the damage to the bank's credibility from abandoning forward guidance.
How many times do you think the Bank of Canada will raise rates before end of 2023?
Three, but that will largely depend on the Federal Reserve. We expect the BoC to pause at one per cent, and then wait for the Fed to begin tightening before lifting rates again. We currently expect the Fed to start lifting rates at the very end of 2023, which would push the normalization for the BoC into early 2024.
Do you think the average Canadian is prepared for the impact of higher rates?
Higher rates are already starting to filter into the economy given the aggressive BoC pricing in the market and move higher in longer-term borrowing rates. That said, high levels of household leverage will amplify the impact, as will the recent shift towards variable rate mortgages.
Royce Mendes, senior economist at CIBC
When do you think the Bank of Canada should start raising rates?
The Bank of Canada can’t fix the supply chain disruptions that are driving higher inflation at the moment, so central bankers should probably wait until the second half of next year when the economy will be more healed before hiking rates.
How many times do you think the Bank of Canada will raise rates before end of 2023?
Our economics and strategy teams believe that the policy rate will be sitting at 1.25 per cent by the end of 2023, but there is admittedly significant uncertainty surrounding that forecast given how quickly-changing COVID trends can alter the trajectory of the economy.
Do you think the average Canadian is prepared for the impact of higher rates?
To the extent that hikes only begin once more Canadians are back at work and rates rise slowly after that, households should be able to absorb higher interest rates with only a moderate increase in delinquencies. However, central bankers need to be wary of raising rates too fast or by too much given how much debt is outstanding.
Jimmy Jean, macro strategist at Desjardins Capital Markets
When do you think the Bank of Canada should start raising rates?
We brought forward our expected timing for liftoff to July 2022 (from October previously). We now expect two hikes in 2022, followed by three more in 2023.
Do you think the average Canadian is prepared for the impact of higher rates?
Yes. We have seen less utilization of lines of credit during the pandemic. The bigger increases in consumer leverage have come from mortgages, and 50 per cent to 60 per cent of new mortgages in 2020 and 2021 have been at a fixed term of five years. Either fixed- or variable-rate mortgage borrowers need to qualify at the stress-test interest rate. I also think high excess savings also give a decent buffer to limit the effect of higher borrowing costs on spending. Moreover, wage growth is likely to be fairly solid amid labour shortages. Finally, I expect the Bank of Canada to hike at measured steps to further help avoid a destabilizing payment shock.
