The Bank of Canada will raise rates as early as the third quarter of next year, at least three months earlier than previously expected, according to economists polled by Reuters who see a risk that the increase could come even sooner.
Just last month economists were almost evenly split on the risk of higher rates; now nearly all are saying sooner rather than later.
That shift in view, based on intensifying inflation pressures – owing to global supply chain bottlenecks, labour shortages and rising energy costs – is increasingly shared by forecasters around the world.
“With inflation pressures continuing to build globally, Canada’s activity story looking robust, and with the jobs market strengthening more quickly than in most other countries, the odds are increasingly stacked in favour of earlier and more aggressive policy tightening next year,” said James Knightley, chief international economist at ING.
That view is in line with the central bank’s latest Business Outlook Survey, which reported firms anticipating stronger demand as the COVID-19 pandemic fades, but supply constraints threatening to limit sales and raise costs.
Canada’s inflation rate accelerated to an 18-year high of 4.4% last month, driven by high gas prices, soaring housing costs and rising food prices, putting pressure on the BoC to consider hiking rates before long.
While the median view of economists in an Oct. 18-22 poll showed the BoC would keep rates unchanged at 0.25% through the first half of next year, rates are expected to rise by 25 basis points to 0.50% in the third quarter.
Financial market traders are pricing in the first hike as early as April.
Forecasts from economists on whether rates will go up in Q3 were on a knife’s edge. But the risk to their expectations was clear: 90% of respondents, or 18 of 20, said a BoC move would come earlier rather than later.
Based on a smaller sample of respondents, the BoC was then forecast to hike in the first quarter of 2023 to 0.75% and end the year at 1.25%.
If the poll is correct, the BoC will notably diverge from the U.S. Federal Reserve, which is expected to keep rates unchanged through the end of next year.
“The big difference between the two countries is (that) in Canada employment is now back to the pre-pandemic level, whereas in the U.S., it’s not,” said Stephen Brown, senior Canada economist at Capital Economics.
Inflation was expected to remain above the central bank’s target and to rise to 4.1% this quarter, up from 3.1% predicted three months back. It was then predicted to ease, averaging between 2.2% and 3.7% in each quarter next year. But next year’s 2.5% average forecast is up from 2.2% predicted in July.
“The second wave of inflation in 2022 will be much more interesting, where we will see some increasing wages alongside demand coming from people spending money,” said Benjamin Tal, deputy chief economist at CIBC Capital Markets.
“That semi-normal to me would be the more risky inflation because it will be demand-driven, and if that’s the case, you would love to see the Bank of Canada and the Fed reacting to it,” said Tal, who expects both central banks to raise rates in the second half of 2022.
Growth was expected to take a hit this year. The export-driven economy would grow on average 5.0% this year, a sharp downgrade from 6.2% predicted three months back. For next year, it was expected to grow 4.0%, unchanged from the previous poll.
The BoC will also taper its asset purchase programme by C$1 billon from its current C$2 billion at its Oct. 27 meeting, the poll showed.