Tiff Macklem signals further rate hikes as economists place bets on height

Most economists predict the end point of interest rate hikes in the range of 4-4.25%

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The head of the Bank of Canada has made it clear that the mission of tackling soaring inflation is not over. Shortly after the central bank made an interest rate hike 50 basis points lower than expected, Tiff Macklem, the governor, said now was not the time to turn away from the emphasis on slowing growth, even though the central bank’s own forecasts show that Canada is on the verge of a recession.

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“This tightening phase will come to an end,” Macklem told reporters on Oct. 26. “We’re getting closer to that point, but we’re not there yet. So we expect interest rates will have to rise further and we will determine the pace based on further developments and I think we have been pretty clear on the key things we are looking at.

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Economic data, including headline inflation readings which recently hit an annualized pace of 6.9%, will inform the Bank of Canada’s rate hike path. The monetary policy report accompanying the decision signaled that higher interest rates would be needed to slow the pace of price increases, as the outlook suggests inflation will still be above the central bank’s target at the end of next year.

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However, Macklem avoided setting a cap or hinting at the end of rate increases. « There is no easy way to restore price stability, » he said at the press conference.

The central bank has now raised the key rate by three and a half percentage points since March, taking the benchmark rate from near zero to 3.75%.

There are no easy solutions to restore price stability

Tiff Macklem, Governor, Bank of Canada

Prior to the October policy decision, markets had widely priced in a 75 basis point hike, and most economists had that number in their preview notes. While some economists viewed the central bank’s smaller increase as a dovish move, most economists put the « terminal rate, » or the end point of interest rate increases, in the range of 4% to 4%. .25%.

It wouldn’t take much more to push rates into that range.

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“We continue to expect another 50 basis point hike in December with a break in January at 4.25%, although risks still tilt towards higher policy rates,” wrote Veronica Clark, economist at Citigroup. Global Markets Inc., in a statement. note to customers.

Clark wasn’t the only one sticking to his call.

A sign for the Bank of Canada in Ottawa.
A sign for the Bank of Canada in Ottawa. Photo by Justin Tang/Bloomberg

“Even with the weaker growth profile, the bank said its preferred measures of inflation did not yet show significant signs of easing, and as such the statement still suggested that interest rates” will have to rise further,” wrote Andrew Grantham, senior economist at CIBC Capital Markets. « As such, this could just represent a slightly slower path to the same maximum interest rate (4.25%) that we had expected prior to today’s lower than expected 50 basis point hike. . »

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Josh Nye, a senior economist with Royal Bank of Canada’s economics team, expressed a similar view, as he expected the rate to rise further towards a high of 4%, even s he called the October decision an “accommodative pivot”.

RBC Dominion Securities Inc., the investment banking arm of Royal Bank, widened the range, saying the terminal rate could reach 4.5%. Still, economist Simon Deeley told clients his own call was for an end point of four per cent.

How do they stop raising rates when inflation is still so far off target?

Jean-François Perrault, Chief Economist, Bank of Nova Scotia

With a steady stream of outsized rate hikes ranging mostly from 50 basis points to a full percentage point this year, it’s easy to forget that a 0.5% hike is still a hawkish move in a historical sense, the norm being to move in quarter-point increments. Many market voices predict Canada will see some sort of return to that norm in December, as they overall estimate a slight 25 basis point rise to close the year, although they haven’t closed outright. the door to a possibility of 50 basis points. point hike.

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Canada’s sensitivity to higher interest rates could put the central bank in a difficult position if the plan were to go beyond a quarter-point hike. The monetary policy report has already shown early signs of an economic slowdown as the new quarterly outlook revealed gross domestic product rose 1.5% in the third quarter, down from an estimate previous 2%. He further predicted that the growth trajectory would slow to an annualized rate of 0.5% in the last quarter of 2022.

It is for this reason and because of the high indebtedness of Canadian households that Royce Mendes, Managing Director and Head of Macroeconomic Strategy for Desjardins Group, has said that Canada’s central bank should pivot on the path of rate hikes. ahead of the US Federal Reserve.

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  1. Bank of Canada Governor Tiff Macklem takes part in a press conference on Wednesday, October 26.

    Bank of Canada opts for half-point lower hike, but says more to come

  2. Bank of Canada Governor Tiff Macklem raised interest rates 50 basis points to 3.75% on Wednesday.

    The Bank of Canada swerves into the ‘chicken game’ with inflation: what economists say

  3. Canadian banks began raising the prime rate after the Bank of Canada raised its interest rate by 50 basis points on Wednesday.

    Canadian banks raise prime rate to 5.95% after Bank of Canada hike

  4. Bank of Canada Governor Tiff Macklem walks outside the bank building in Ottawa.

    Lower rate hike shows Bank of Canada almost done, economist says

« As we’ve been saying for a long time, the Canadian central bank needed to pivot ahead of its U.S. counterpart due to the interest rate sensitivity of the Canadian economy, » Mendes said in an Oct. 26 note. “While the statement leaves the door open to the possibility of another 50 basis point move in December, the expected economic underperformance will likely limit the next upside to just 25 basis points.”

In the search for a ceiling for rising rates, Bank of Nova Scotia chief economist Jean-Francois Perrault said one of the biggest challenges the central bank will face will be management. inflation expectations among Canadians.

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« People don’t necessarily believe inflation is coming down very quickly, » Perrault told Larysa Harapyn of the Financial Post in an Oct. 26 interview. “So how is it possible for the central bank to stop raising rates to 4.25% when inflation is still above 6%? What kind of leap of faith is it going to take for Canadians to say…the bank has done enough?

« I think that’s the biggest challenge they have, » he added. « How do they slow down, how do they stop raising rates when inflation is still so far off target? »

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