Noah Zivitz

Managing Editor, BNN Bloomberg

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The Bank of Canada went almost 20 years without hiking its benchmark interest rate by half a point. Now, in the span of less than two months, it's gone back-to-back with moves of that magnitude as it attempts to wrestle down inflation. But as far as a top fixed income expert is concerned, Canadians should brace themselves for even more aggressive monetary tightening in the months ahead.

"What was not expected (Wednesday) was the hawkishness of the Bank of Canada. Which, actually, you know, it's a prelude to a 75-basis-point hike in our minds," said Earl Davis, BMO Global Asset Management's head of fixed income and money markets, in an interview. There are 100 basis points in a percentage point.

"Seventy-five basis points next move, and possibly another 75, so they'll get rates up to 2.75 to three per cent by September."

The spillover of such moves for the Canadian economy could be profound at a time when formerly red-hot housing markets are cooling after the Bank of Canada started raising interest rates in March, and with some households getting by without much of a financial safety net. A recent Leger survey for BNN Bloomberg and RATESDOTCA suggested 55 per cent of Canadian homeowners would struggle to cover more than $200 in extra monthly costs.

The prospect of even larger rate hikes was put on the table by the Bank of Canada Wednesday, when it lifted its target for the overnight rate to 1.5 per cent from 1.0 per cent and stated it is "prepared to act more forcefully if needed to meet its commitment to achieve the two per cent inflation target."

Davis isn’t alone in predicting the bank could be getting ready to raise rates by three-quarters of a point. Strategists at BofA Global Research said in a report to clients Wednesday they think there’s a “very real possibility” of such a move.

Inflation hasn't been anywhere near the two per cent target in more than a year as ongoing supply chain logjams, surging oil prices, and Russia's invasion of Ukraine all contribute to a cost of living that's at multi-decade highs. Most recently, Statistics Canada’s consumer price index jumped 6.8 per cent year-over-year in April, hitting the highest level since January 1991.

Davis said front-loading rate hikes by moving more aggressively will ultimately give the Bank of Canada more flexibility. However, with inflation running so far ahead of target, he's circumspect about the bank's ability to get price pressure under control any time soon.

"That's the million-dollar question (whether the bank is, or will be, in control of inflation). They're doing what they have to do. My personal confidence level is not that high, because they are way below inflation (with the benchmark rate)." he said.

Davis added he thinks a best case scenario will see inflation back at the two per cent target in the fourth quarter of 2023.

"They have to get to a tightening mode ... and what a tightening means is above the neutral rate, and the Bank of Canada itself said neutral rates, the high end is three per cent. So they won't get above that til [the first quarter] of 2023. And then I think you start seeing the impacts of inflation to get in between two and three per cent.”

WHAT OTHERS ARE SAYING

 
"I think [Davis is] a little tad aggressive, especially if I take a look at what's going on south of the border. I think (U.S. Federal Reserve) Chairman Powell has already put on the table that they're looking more at 50-basis-point hikes. I think it would be kind of out of book, or out of school, for Canada perhaps to raise a little bit more forcefully."
-John Goldsmith, Montrusco Bolton portfolio manager
 
"The statement says that officials could act ‘more forcefully if needed’ which clearly opens the door to a 75bp move at the upcoming July announcement date. However, we don’t think the data will justify such a move with the housing market already reacting negatively to higher rates."
-Royce Mendes, Desjardins head of macro strategy
 
"Don't expect the hawkish rhetoric to let up until inflation starts to trend lower. We continue to look for another 50bp hike in July, but there's a risk of a 75bp move if inflation surprises to the high side yet again."
-Benjamin Reitzes, BMO Capital Markets Canadian rates and macro strategist
 
"On balance, we suspect that the bank will opt to continue with another 50bp hike, not least because we expect a further significant deterioration in housing market conditions."
-Paul Ashworth, Capital Economics chief North America economist