The Bank of Canada could start a cycle of interest-rate hikes this week with its first increase since 2018. Many economists and traders expect the central bank to boost its key policy rate 25 basis points on Wednesday, with more to follow.  

How aggressive will the bank be this year with inflation running at its highest in three decades? Bloomberg asked investment managers for their view on the key factors guiding Governor Tiff Macklem and members of the rate-setting council.   

Pimco: Expectations are too hawkish

The swaps market is pricing in about six rate hikes over the next 12 months, but that may be “a little bit more than what actually ends up getting delivered,” said Vinayak Seshasayee, a portfolio manager overseeing Canadian fixed-income assets at Pacific Investment Management Co. 

Pimco sees the Ottawa-based central bank moving four times this year, similar to expectations for the U.S. Federal Reserve. Macklem has other tools for tightening, such as shrinking the balance sheet, Seshasayee said, and there are other factors that will prevent Canadian policy makers from pushing rates too far, too fast. 

“In Canada, we have recovered a lot of jobs, but when you put the labor market through other lenses, there still appears to be a fair amount of slack in the labor market -- particularly when you look at things like total hours, work productivity,” Seshasayee said. Canadian households also have high average debt levels, making the economy sensitive to higher rates.

SLC: Macklem wants to reassure consumers

A unit of Sun Life Financial Inc. pointed to the bank’s first foray into quantitative easing and unprecedented spending by Prime Minister Justin Trudeau’s government as complicating factors. 

“I think the Bank of Canada realizes that we are in uncharted territory here in terms of both QE and the amount of fiscal stimulus that was implemented alongside the decrease in rates,” said Randall Malcolm, a senior managing director at SLC Management. 

“It has been a long time since we have seen inflation this elevated in Canada and I think that the bank wants to reassure Canadian consumers and businesses that it is prepared to act,” Malcolm said. That’s especially the case after a survey last week showed the Canadian economy pressed up against its limits, with almost 80 per cent of executives saying worker shortages are intensifying, he said. 

Capital Group: Fed gives BoC room to hike

Strong growth and easy policy in the U.S., Canada’s largest trading partner, has given Macklem some room to move on rates, said Tom Reithinger, a fixed income portfolio manager at Capital Group.

“The BOC has tended to be more hawkish because Canada benefited from the easy monetary policy in the U.S.,” Reithinger said. “This is generally the case for smaller open economies with large neighbors.” 

He expects the Bank of Canada will begin hiking in the first quarter, either this week or at its March 2 decision. 

Invesco: Pre-COVID economy = pre-COVID rates

Canada’s economy has exceeded expectations in recent months, according to Invesco Canada Ltd. portfolio manager Avi Hooper. 

“The recovery, if anything, has accelerated from a growth perspective more quickly than any economist on the street, including ourselves, would have expected,” Hooper said. That has put the economy back on similar footing to before the pandemic, when the central bank’s policy rate was 1.75 per cent.

Still, Hooper cautions that the bank will be governed, in part, by what happens with U.S. policy. “The Bank of Canada is not going to detach itself from the path of the U.S. Federal Reserve in any meaningful way. Why should it? We’re on the same economic cycle.”