BoC Preview: Forecasts from 10 major banks, to hike or not to hike?

The Bank of Canada (BoC) is set to announce its policy decision this Wednesday at 15:00 GMT and as we get closer to the release time, here are the expectations as forecast by the economists and researchers of 10 major banks, regarding the upcoming announcement. 

The central bank is seen holding the overnight rate steady at 0.25%, although a surprise 25-basis points (bps) could not come as a surprise amid Canada’s multi-decade high inflation rate and robust labor market.  

NBF

“We are officially moving our call for the first Bank of Canada interest rate hike from March to January. That said, unlike other forecasters, we don’t see the BOS or December CPI report as having materially changed the policy trajectory for the rest of the year. Thus, we remain confident in our call for 5 interest rate hikes in 2022, with the overnight target hitting 1.50% by year-end.”

Standard Chartered

“We now expect the BoC to raise its policy rate by 25bps to 0.5% amid soaring inflation readings and robust economic recovery. We expect the BoC to hike again in March and bring the end-2022 policy rate to 1.5% (1.25% prior). The hike is about 65% priced in, so markets could be modestly surprised. We doubt that the BoC will endorse the six hikes now priced in, but the CAD could strengthen a bit if the BoC signals a follow-up hike in March. BoC Governor Macklen may be worried enough about the run-up in inflation to indicate an intention to frontload hikes a bit to bring the policy rate closer to neutral. A clear signal that balance sheet shrinkage is likely to start in H1 would add support for the CAD.”

Scotiabank

“We look for rate lift-off with the benchmark rate expected to reach 2.0% this year. Markets remain reluctant to fully endorse a 1/4 point hike next week (swaps are pricing in around 17bps of a hike) but higher rates are coming sooner or later as the BoC responds to signs that inflation expectations are becoming unanchored.”

ING

“We now look for the BoC to raise interest rates 25bp at the 26 January meeting – the same day as the Fed. Activity is strong, the economy is at record employment and inflation is at 30-year highs. Covid containment measures are also set to be eased at the end of the month and this should signal the green light to hike rates. At least three more hikes are likely this year with some analysts expecting as many as five increases. Expect a positive impact on CAD, although external risks are mounting”

TDS

“Given recent strong labour market, survey, and inflation data in Q4, the most prudent course of action is for the BoC to look through the Omicron lockdown and hike by 25 bps in January in order to ensure that inflation expectations do not become unanchored. We also look for 25 bp hikes in March, April, and October this year.” 

RBC Economics

“We expect the bank to hold off on a change but in a very close call. Clearly, the conditions are in place to support higher rates. The BoC is clearly running out of reasons to keep interest rates at emergency low levels. Rates will rise soon, even if the bank only uses this announcement to foreshadow them (as we expect) rather than hiking immediately.”

CIBC

“The BoC will shift from forward guidance to a mission mostly accomplished message by saying that, prior to an Omicron pull back, the economy had essentially met some key conditions for tightening to commence. Aside from some elbow room on total hours worked, we were nearing full employment at the last reading. The issue is that we’ve likely taken a step back from that precipice due to Omicron, and with some uncertainty on where that story is going, the Bank could still opt to set the stage for a hike in March or April when there’s greater clarity. The Bank’s growth forecast will be marked down to make room for a weak Q1, but of greater interest is whether there’s much of a change in their inflation outlook. If it is revised upwards for the latter half of the year, that might portend a slightly firmer pace for rate hikes in 2022.”

MUFG

“Even if the BoC does not begin raising rates, we expect a hawkish signal that hikes will be delivered soon at either the March or April meetings in response to evidence that both headline and core inflation both moved further above target in December. There is a risk though that Canada’s economy could be hit more in the near-term by the latest Omicron wave given of tighter restrictions have been re-imposed than in other major economies. It could argue for a little more near-term caution from the BoC.” 

Citibank

“We expect the BoC to raise rates by 25bp. We then expect quarterly 25bp rate hikes, although with risks of faster rises. However, this base case is notably slower than the market that is looking for 25bp rate hikes at each consecutive meeting through October.”

Danske Bank

“While its latest guidance for the first-rate hike has been for the ‘middle quarters of 2022’ there is a real likelihood that BoC will hike policy rates by 25bp. Analysts are almost evenly divided on the call while markets are leaning slightly towards a hike. As recent data supports the need for policy tightening we would not be surprised to see a hike even if our base case (based on BoC's guidance) is for unchanged policy rates.”

See – USD/CAD: Unchanged BoC to offer a good entry point for shorts aimed at 1.2500 – Credit Suisse