Jun 1, 2022
'Very real possibility' BoC hikes three-quarters of a point in July: BofA
A 75 basis point rate hike in July is a very real possibility: BofA's Carlos Capistran
Strategists at Bank of America Securities say there’s a “very real possibility” that the Bank of Canada will hike its benchmark rate by three-quarters of a percentage point at its July meeting as the central bank frets over runaway inflation.
“We believe the Bank of Canada clearly wants to move fast to the two to three per cent neutral range. So a 75 [basis point] hike in July is a very real possibility, in our view,” Carlos Capistran, Canada and Mexico economist at Bank of America Securities, said in a note to clients Wednesday.
He also said the Canadian central bank’s decision between a half-point and three-quarter point hike at the July meeting will highly depend on the May inflation data, which is due out on June 22.
As of mid-day Wednesday, Bloomberg data showed the median estimate for May inflation is for a second consecutive jump of 6.8 per cent year-over-year.
Bank of America is currently expecting a third consecutive half-point hike in July, but said there are “upside risks to our Bank of Canada call.”
After July, the firm is expecting quarter-point hikes at subsequent policy meetings until the overnight rate reaches 3.5 per cent.
The Bank of Canada lifted its overnight rate target to 1.5 per cent Wednesday, an increase of half a percentage point. The accompanying statement said the “Governing Council is prepared to act more forcefully if needed to meet its commitment to achieve the two per cent inflation target.”
“This is a very strong statement from the Bank of Canada by historical standards,” Capistran wrote.
He pointed out that aside from a 100 basis point hike in 1998, the central bank has never deployed a 75 basis point hike before (there are 100 basis points in a percentage point). It has only hiked its benchmark rate by 50 basis points on five occasions, including Wednesday’s increase.