Bank of Canada preview: 75-bps rate hike in the cards this week


July 18, 2022 Facebook Twitter LinkedIn Google+ Mortgage News Canada



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Markets and economists alike overwhelmingly expect the Bank of Canada to lift its policy rate by 75 basis points when it meets this Wednesday.

If it does, it would be the BoC’s largest rate hike since 1998.

That would take the Bank’s target overnight rate to 2.25%, and implies a prime rate (upon which variable-rate mortgages and lines of credit are priced) of 4.45%. The last time Canadians saw a prime rate above 4% was back in 2008.

Experts agree that with inflation still stubbornly at 7.7%, the Bank of Canada will be forced to move aggressively at its upcoming meetings to break consumer expectations of lingering high inflation.

“Unless the BoC breaks inflation psychology with convincing hikes this month and in September—and/or oil prices dive—CPI’s return to 2% could take more than two years,” rate expert Rob McLister of MortgageLogic.news wrote in a recent client note. “Past inflation spikes make that clear.”

Here’s a collection of comments and outlooks released recently related to the BoC’s upcoming meeting on Wednesday:

On rate-hike expectations:

  • RBC: “We expect the economic growth risks from hiking rates too aggressively in the near-term will be overshadowed by the medium-term cost of not doing enough. The overnight rate remains too low at 1.5%. And the 75 basis point hike we expect this week would still leave it towards the lower end of the bank’s estimate of its ‘neutral’ range.”
  • National Bank of Canada: “Although markets have moved well off of peak hawkishness for 2023 (i.e., 4%-plus policy rates), there’s been nothing to upend the ultra-aggressive near-term trajectory. Quite the contrary. Another blistering inflation surprise in Canada last month means the fire under the BoC’s feet has only grown hotter. A fresh jobs report that technically showed net job losses, was much stronger than it appeared and is symptomatic of an exceedingly-tight labour market…we expect the Bank of Canada to increase its overnight target by 75 basis points on Wednesday, noting that they will continue to ‘act forcefully’ to bring down inflation. That should mean an above-25 bp hike in September but expect the BoC to keep the ‘50 vs. 75’ debate up in the air and data dependent.” (Source)

On inflation:

  • National Bank of Canada: “Another upside inflation surprise in May’s CPI report has us tracking to overshoot the BoC’s Q2 inflation projection (which was laid down just three months ago) by 1.7%-pts. While inflation forecast misses have been a staple of the past year, this one is set to be the biggest miss yet. So, once again, expect near-term inflation projections to be revised higher in the MPR.” (Source)

On the latest employment data

  • TD Economics: June’s employment report, which “featured a weak headline, but better details, is unlikely to sway [the BoC’s] aggressive stance, particularly with job markets so tight and wages accelerating rapidly. Policymakers are resolute in their determination to rein in inflation and prevent expectations from becoming further unanchored. As such, we still expect them to hike by 75 bps at their next policy meeting.” (Source)
  • Scotiabank: “The Bank of Canada is very likely to ignore a surprise loss of 43k jobs in June. Their fixation is upon their inflation mandate with inflation running at about four times their 2% target.” (Source)

On the September rate decision:

  • National Bank of Canada: In its accompanying statement, “we’re looking for something along the lines of, ‘the Governing Council is prepared to continue to act forcefully.’ Such language would leave an appropriately hawkish bias intact (i.e., keeping the market prepped for a larger-than-25 bp move), while retaining flexibility on the size of September’s hike (i.e., 50 or 75 bps).” (Source)
  • BMO: After the July meeting, “we’re forecasting a 50-bp hike followed by 25-bp moves in the final two meetings of the year, which will leave the policy rate at 3.25%, a bit above the neutral range.” (Source)
  • RBC: “We expect the central bank to continue on a more aggressive hiking path with another 75 basis point increase in September.”

The latest rate forecasts

The following are the latest interest rate and bond yield forecasts from the Big 6 banks, with any changes from their previous forecasts in parenthesis.

  Target Rate:
Year-end ’22
Target Rate:
Year-end ’23
Target Rate:
Year-end ’24
5-Year BoC Bond Yield:
Year-end ’22
5-Year BoC Bond Yield:
Year-end ’23
BMO 3.25% (+25bps) 3.25% (+25bps) NA 3.35% (+45bps) 3.20% (+30bps)
CIBC 3.00% (+75bps) 3.00% (+50bps) NA NA NA
NBC 3.25% (+75bps) 3.25% (+75bps) NA 3.55% (+50bps) 3.30% (+45bps)
RBC 3.25% (+75bps) 3.00% (+50bps) NA 2.80% (+20bps) 2.40% (+20bps)
Scotia 3.00% 3.00% NA 3.10% (+10bps) 2.75% (-35bps)
TD 3.00% (+50bps) 3.25% NA 3.65% (+75bps) 3.25% (+95bps)

Featured image: Justin Tang/Bloomberg via Getty Images



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