Bank of Canada to go for bigger rate hikes, but pause before Fed does – Reuters Poll

“The Bank of Canada (BOC) is set to raise its overnight rate by a hefty 75 basis points (bps) this month and by another 50 in September, front-loading a campaign to take monetary policy to where it will restrain the economy,” according to a Reuters poll of 29 economists.

Key findings

But the June 30-July six survey suggests the BoC will halt earlier than the Fed, pausing throughout next year as deeply indebted Canadian households are more vulnerable to higher borrowing costs.

Still, over 90% of respondents, 27 of 29, said the BoC, which already delivered back-to-back 50 basis point hikes at its previous two meetings, will deliver a 75 basis point hike to 2.25% on July 13 following a similar move at the Fed's June meeting.

The BoC will hike again by 50 basis points in September, according to a significant majority of economists, taking the overnight rate to 2.75%. That is well into a neutral range - where the economy is neither stimulated nor restricted by policy - estimated at 2-3% by economists in the poll.

Most respondents said the BoC would dial down the size of its hikes to 25 basis point increments or lower in October and December, taking the rate to 3.25% by year-end, in line with interest rate futures. But over one-quarter of poll respondents predicted the year-end rate to be higher than that.

The BoC is expected to pause throughout next year, even as the Fed carries on raising rates.

Inflation was expected to cool significantly from a near 40-year high of 7.7% in May to 2.2% by the fourth quarter of next year, according to the poll, as recession risks rise.

All economists but one responding to an additional question said the cost of living crisis would not ease significantly for at least six months.

Also read: USD/CAD retreats towards 1.3000 as oil recovers, focus on US ADP Employment