Investors expect Bank of Canada to move to half-percentage-point rate hikes

Bank of Canada Governor Tiff Macklem attends a news conference in Ottawa, Ontario, Canada March 3, 2022. REUTERS/Blair Gable/File Photo

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TORONTO, March 29 (Reuters) – As Canada’s inflation outlook deteriorates, investors are betting the country’s central bank will begin raising its key interest rate in half-percentage-point increments, the first of the rarely used upward moves coming perhaps as soon as next month.

Money markets expect the Bank of Canada to raise interest rates by 200 to 225 basis points in the six remaining interest rate announcements in 2022, up from around 140 basis points before a report on the hit job this month. Read more

This bet implies that up to three such meetings could result in hikes above the quarter-percentage-point increases typically favored by the central bank. The last time it broke a half-percentage-point increase was in May 2000.

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The Canadian economy could be particularly sensitive to a faster pace of interest rate hikes after households increased borrowing to record levels during the COVID-19 pandemic to participate in a booming housing market. Read more

“The Bank of Canada needs to tighten policy aggressively to maintain inflation expectations for the consumer and also for entrenched businesses,” said Simon Harvey, head of currency analysis for Monex Europe and Monex Canada.

“It’s about doing it now, because later it will cost more for economic growth.”

The central bank raised borrowing costs earlier this month for the first time since October 2018, taking its benchmark rate to 0.50%. Read more

The odds of a bigger move on April 13, when the central bank makes its next interest rate announcement, jumped to 70% after BoC Deputy Governor Sharon Kozicki said Friday. that the pace and magnitude of interest rate increases would be actively discussed. at this meeting.

The Federal Reserve is also expected to raise its benchmark overnight interest rate by 50 basis points at its May 3-4 policy meeting.

The rush for prices into more aggressive tightening comes as a rally in commodities sparked by Russia’s invasion of Ukraine threatens to push Canadian inflation higher for longer. It hit a 30-year high of 5.7% in February. Read more

The historic link between the Canadian dollar and oil prices has weakened, so the Bank of Canada can no longer rely on a stronger currency to dampen inflationary pressures caused by rising energy costs, while that Canadian Prime Minister Justin Trudeau’s surprise political deal with the small left-wing bank New Democrats could lead to increased spending that further fuels inflation. Read more

EXCEEDING THE NEUTRAL RATE

“Markets expect the Bank of Canada to exceed its own neutral rate estimate as it attempts to rein in inflation,” said Karl Schamotta, chief market strategist at Corpay.

The neutral rate is the level that should be in place when the economy is at full strength and inflation is on target. So it’s kind of a sign indicating where interest rates could go.

The BoC is due to update its estimate of the neutral rate in the monetary policy report that accompanies next month’s rate decision. With productivity growth weakening, economists doubt the central bank will raise its estimate from the current level of 2.25%, but it could link it to a hawkish signal.

Rather than adjust its neutral estimate, the BoC “could guide a possible need” for the endpoint in rates to rise above it, said Derek Holt, vice president of financial markets economics at Scotiabank.

Investors see the Bank of Canada’s key rate peaking at around 3% next year .

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Reporting by Fergal Smith Editing by Paul Simao

Our standards: The Thomson Reuters Trust Principles.

Shawanda H. Saldana