Markets raise bets on BoC rate hike this summer, cuts in 2024

Markets raise bets on BoC rate hike this summer, cuts in 2024

Bank of Canada Governor Tiff Macklem takes part in a news conference in Ottawa, Ontario, Canada April 13, 2022. REUTERS/Blair Gable

Bank of Canada Governor Tiff Macklem takes part in a news conference in Ottawa, Ontario, Canada April 13, 2022. REUTERS/Blair Gable

Investors are increasing their batches that the Bank of Canada will hike its key lending rate at least once more this summer and delay any cuts to next year in the wake of stronger-than-expected economic data.

“Overall, I think the consensus is going into 2023 and even in January was that inflation was decelerating and that was going to just continue on a nice path down towards 2% through 2023. And I think markets and investors are now starting to grapple with the idea that it might not be as smooth of a path down to 2% as they had originally thought,” Taylor Schleich, director and rates strategist with National Bank Financial Markets, told Yahoo Finance Canada in an interview.

Aside from the more immediate impact of higher borrowing costs have had on the real estate market, a rash of datapoints including jobs reports on both sides of the border, which have wide-ranging implications for the broader economy, have recently surpassed expectations.

“Most of the interest rate repricing has been driven by what’s been going on globally, particularly in the US You had labor market data, which surprised significantly to the upside earlier in the month, and then in these past two weeks, you’ve just had data across the spectrum come out stronger than consensus expectations, and that includes inflation,” Schleich said.

“We also saw some revisions to inflation over last year, which showed that it actually didn’t accelerate as much as we had thought.”

Overnight swap data shows significantly increased odds of an interest rate hike at the Bank of Canada’s July meeting and cuts aren’t being forecasted until early next year. Earlier this month, the data showed predictions for rate cuts to begin as early as this fall.

“You get a few data points, you get the Fed being very hawkish, you get a blowout employment report. … Markets are thinking, maybe the economy is stronger than what everyone has been thinking. And that would necessitate the Bank of Canada to stop pausing and hiking once again in the summertime,” James Orlando, senior economist at TD Economics, said.

He adds that the strength in the labor market is “absolutely one of the factors that’s on people’s minds” because a strong job market and wage increases usually equate to more consumer spending.

“People are thinking that everything is moving higher, rates are moving higher and really just pushing out that forecast a little bit more,” Orlando added.

High bar for further rate hikes

Bank of Canada governor Tiff Macklem told investors the central bank was on a “conditional pause” late last month to assess the impact of higher rates on the economy after the Bank’s most aggressive tightening campaign that lifted its benchmark rate to 4.50 per cent.

That sets a much higher bar for rate hikes in Canada, according to Schleich.

On the contrary, Macklem’s US counterpart, Fed chair Jerome Powell, says he intends to continue hiking rates.

Despite the stronger data, both Schleich and Orlando aren’t quite ready yet to change their official predictions that rates have peaked because they want to see how the economy unfolds in the coming months and higher borrowing costs work their way through the economy.

“I don’t think that the economic data that we’ve seen since the Bank of Canada announced its pause has been enough to convince it to hike again just yet. You need to see more than just one job print to convince it that it needs to change courses,” Orlando said.

Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.

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