Economists claim that the odds of a Bank of Canada rate hike at its monetary policy decision meeting this week versus a hold is essentially based on predicting the outcome of a coin flip.
Markets believe that the Bank of Canada will wait until Friday to release the employment data for May.
This may increase or decrease the probability of the Bank raising rates by 25 basis points (0.25%) at its meeting on July 12.
Benjamin Reitzes, of BMO noted that the Bank of Canada policy announcement on June 7 was a very close call. The decision to stay on hold or hike rates by another 25 basis points is on a razor’s edge.
Desjardins economists also noted that it is almost a coin toss whether the Bank will raise rates or not this week.
The overnight index swap markets currently price in a probability of 41% for a rate increase this week. However, odds go up to 78% at the Bank’s July meeting.
Rates aren’t as high as they should be
A recent panel discussion Doug Porter, BMO’s Chief economist and host at the Empire Club of Canada said that rising house prices is another indicator which the Bank will be watching closely.
If the housing market, which is the interest sensitive component in the cycle of the economy, can withstand rate hikes of the last year, and has started to recover, then the question must be asked: “Have rates been nearly too high? Porter stated. Porter said. “I think that the Bank of Canada, as well as the Federal Reserve could go back and increase interest rates.”
Only Scotia Economics, out of the six major banks, predicts a rate increase on Wednesday. It expects that this will be followed by “continued guidelines which leave the door open for further tightening.”
The economists said: “We believe the BoC should weigh up potential downside risks to inflation more than is warranted after the announcement of the pause.” Writer. This suggests that we need to be more conservative in our approach to managing inflation and an extra 25 basis point move at the meeting this week.
The BoC can no longer afford to be patient and wait for the outcome of a vote. [upside] “Risks materialize due to the large costs associated with a continued deviation from our target,” said they. The question isn’t whether Governor Macklem will increase his inflation forecasts but by how much.
The forecasters’ predictions
Rate decision
- Desjardins: While we would not rule [out a June rate hike] We see a July move as more probable…but market expectations are still pointing towards the status quo at the next meeting. The market could be surprised by a rate increase, which would lead to speculation and tightening of financial conditions. This is something that the BoC might not feel comfortable with.
- National Bank of: We see an argument to hold off at least for another month. This will give policymakers more time to gather data and evaluate the impact of rate hikes earlier on inflation/economics. Their overnight target already sits well above the neutral zone (2-3%), which they estimate. This is a very ‘live meeting’ and given the way they have structured their guidance, it would be easy for them to justify an increase in rates.
The GDP
- BMO: The latest reading on the economy showed that Q1 GDP grew 3.1% annuallyized. Momentum is picking up in Q2. Flash estimate of April GDP is +0.2%. This seems to have overcome the two-week strike in the public sector, and suggests that there’s more momentum in the economy than anticipated. The Bank of Canada projects (hopes?) The Bank of Canada is projecting (hoping?) that an extended period of growth below potential will bring down inflation in the coming quarters. By the end of 2020, the target of 2% should be achieved.”
On employment:
- National Bank of: This spectacular job creation comes against a backdrop of equally spectacular population growth…Rate hikes have been very aggressive and will continue to weigh on the economy with some lag…” The spectacular growth in the population is a perfect backdrop for this job creation. Rate hikes are very aggressive, and they will still weigh on economy with lag …”
Rate forecasts for the latest quarter
Following are the most recent interest rate and yield predictions from the Big 6 Banks, any differences from previous forecasts will be noted in the parenthesis.
| The Target Rate is: Year-end ’23 |
The Target Rate is: Year-end ’24 |
The Target Rate is: Year-end ’25 |
Bond Yields for 5-Year BoC Bonds: Year-end ’23 |
Bond Yields for 5-Year BoC Bonds: Year-end ’24 |
|
| BMO | 4.50% | 3.50% | NA | 3.50% (+25bps) |
3.25% (+30bps) |
| CIBC | 4.50% | 3.00% | NA | NA | NA |
| NBC | 4.00% (-25bps) | 3.00% | NA | 2.80% (-10bps) | 2.70% (+5bps) |
| RBC | 4.50% | 3.00% | NA | 2.75% | 2.55% |
| ScotIA | 4.75% (+25bps) | 3.25% (+25bps) | NA | 3.25% (-10bps) | 3.25% |
| TD | 4.50% | 2.50% | NA | 2.85% (-5bps) | 2.60% |