Find out what economists are saying
Experts agree that the Bank of Canada can afford to put a stop to the interest rate-hike cycle in the coming months, even if the Federal Reserve decides to keep raising borrowing costs next year. In fact, most point out that Governor Tiff Macklem can leave the interest rate a hundred basis lower than its counterpart benchmark rate in the US without having to break a sweat, a Bloomberg survey reveals.
Bloomberg solicited the opinions of 16 economists between November 25 and 30 and found more than half saying that the Bank of Canada would not signal a pause just yet. Still, Macklem was expected to end the rate-hike cycle after this month’s meeting or in January after one or two more hikes. Respondents were equally split on whether the Bank would announce a 25-basis point or 50-basis-point increase at its meeting next Wednesday. Most believed the jobs data would be key to settling the question.
Read more: How will the Bank of Canada react to a surging labour market?
In a video interview with BNN Bloomberg, CIBC Capital Markets deputy chief economist Benjamin Tal shared his expectations of another 50-basis-point hike in this month’s meeting followed by a year-long period of “rest” in 2023 as the Bank of Canada assesses whether inflation was gone for good.
The Bank of Canada was then expected to leave borrowing costs at 4.25%, before cutting the overnight rate by October next year.
In contrast, the markets have been placing their bets on a different outcome for the Fed, with most predicting that Federal Reserve Chair Jerome Powell will raise the Fed funds rate between 4.75% and 5%.
The difference in rate-trend expectations suggested that Macklem had room to test the potential beginning of the end to Canada’s aggressive rate-hike cycle just as momentum in the domestic economy begins to slow down, Bloomberg reported.
“The only reason that the Bank of Canada would be worried about diverging from the Fed would be the currency reaction,” said Desjardins Capital Markets head of macro strategy Royce Mendes in an email to the news outlet. But the exchange rate should have already taken that into account, Mendes explained, especially given the significant divergence already priced into current markets.
Ninety-four per cent (94%) of economists surveyed added that Canada’s economy is more sensitive to interest rate-hikes than the US, while 80% agreed that the Canadian government’s spending did not undermine the Bank of Canada’s efforts to control inflation.
Half of the economists surveyed thought the Bank of Canada’s most recent forecasts for economic growth were too optimistic.
Read more: What is going to happen to Canada house prices in 2023?
These predictions follow the bank’s decision earlier this year to abandon the pandemic-driven historic low rate of 0.25% that had buoyed the market until March in favour of a 3.75% overnight rate, as well as its surprising 0.50% increase last meeting – down from the 75-basis-point rise in September and one-percentage-point rise in July.
