Mar 28, 2022
Market leans into half-point rate hike by Bank of Canada in April
By Noah Zivitz
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Hawkish talk from a senior Bank of Canada official is leading the market to believe that a half-point hike is in the cards next month.
Data tracked by Bloomberg Monday indicated that traders have priced in approximately a 75-per-cent chance that the central bank will raise its target for the overnight rate by 50 basis points on April 13.
On Friday, Bank of Canada Deputy Governor Sharon Kozicki said in a speech that the central bank is "prepared to act forcefully" to rein in inflation, which has surged far above the bank's target range of one to three per cent.
Her remarks prompted Citi Economics to tell clients it’s now expecting half-point hikes at the Bank of Canada’s policy meetings in April, June, and July; followed by subsequent quarter-point moves that it expects will push the bank’s policy rate to 2.75 per cent by year-end.
Statistics Canada's most recent consumer price index showed inflation surged 5.7 per cent year-over-year in February, that was the highest level since August 1991. Inflation in this country has consistently been above the Bank of Canada's target range since April of last year after the pandemic roiled global supply chains.
The Bank of Canada’s main interest rate is currently 0.5 per cent, after it was raised by a quarter-point on March 2.
“The persistent acceleration and upside surprises in inflation over the past months and quarters have clearly struck a nerve with central bankers,” wrote BMO Capital Markets Canadian Rates and Macro Strategist Benjamin Reitzes in a report to clients Friday.
“While stopping short of explicitly mentioning a potential 50 [basis point] move, the hawkish tone of the (Kozicki) speech swings the door wide open to more aggressive rate hikes.”
Reitzes and his team at BMO subsequently told clients on Monday they expect the Bank of Canada will hike by half a percentage point at each of its next two policy meetings.
Editor’s note: An earlier version of this story stated the market had fully priced in a half-point hike on April 13; that was based on overnight swaps. The updated version of the story takes the Canadian Overnight Repo Rate Average (CORRA) into account.
