BoC likely to hike by 50bps and may pause for a year before cutting: Economist Benjamin Tal
Economists are forecasting the Bank of Canada will hike interest rates for the seventh-straight time on Wednesday.
According to economists’ estimates tracked by the Bloomberg terminal, the average forecast is a 50-basis-point (bps) increase from the Canadian central bank, but several experts are also leaning towards a 25-basis-point increase.
“We're looking for a 25bps hike tomorrow but the consensus is almost evenly split between 25bps and 50bps,” said Josh Nye, senior economist at the Royal Bank of Canada in a phone interview on Tuesday.
“That's kind of what Macklem framed his decision as back in October, 25bps or 50bps, and I mean their guidance is pretty clear that there they were planning more rate hikes as of October so we think they will follow through with that.”
Sal Guatieri, director and senior economist, BMO Capital Markets, said he’s in the camp of a 50-basis-point increase Wednesday, due to recent strong economic data.
“We just think the recent data has been surprisingly strong, especially for most of the economic numbers, in particular the labour market indicators,” Guatieri said in a phone interview on Tuesday.
With the recent jobs gains and drop in the unemployment rate, Guatieri argued, “there’s still more work needed here when it comes to interest rates.”
But regardless of whether the Canadian central bank increases by 25bps or 50bps, it won’t make much of a difference, according to Avery Shenfeld, chief economist of CIBC World Markets Inc.
“If they opt for 25 basis points but say that further hikes are likely, that really is very much the same policy is just doing 50 basis points,” Shenfeld said in a phone interview on Tuesday.
PROBABILITY OF A HOLD OR HIGHER HIKE
Bank of Canada Governor Tiff Macklem previously reiterated the central bank’s commitment to raising rates at the last interest rate meeting in October.
“We've signalled very clearly that we expect rates will need to rise further,” Macklem said at a press conference in October.
“And that could mean another bigger than normal increase, it could mean that we can move to a more normal size, 25-basis-point increases.”
While there’s a low chance the Bank of Canada could leave interest rates unchanged on Wednesday, Nye said a larger-than-expected increase would catch economists off guard.
“I think it would be it would be very surprising and it would really catch a lot of us off guard if they sort of re-accelerated the pace of tightening with a 75 or 100 basis point hike,” Nye said.
“I think 50bps would already be ahead of what the market is pricing in and would be a hawkish surprise in that sense.”
Regardless of what the Bank of Canada decides on Wednesday, Julia Wendling, economist at Rosenberg Research, thinks the central bank has already overtightened.
“We already think that they've [the Bank of Canada] overtightened,” Wendling said in a phone interview on Tuesday.
“We are hiking into the most inverted yield curve since the John Crow era in the 90s and that preceded a recession so a pause [in interest rate hikes] could be coming.”
On Monday, Canada’s yield curve reached its steepest inversion since the early 1990s, which was right before the economy fell into a deep downturn.
HOLD IN SIGHT?
Shenfeld said they’ll be paying close attention to the language in the Bank of Canada’s press release tomorrow.
He added that the only real decision that “would be material, would be to announce a 25-basis-point hike and suggest that rates were now on hold.”
“That would be obviously a decision by the bank that the peak rate is a little lower than we had expected, and perhaps a sign that they're more concerned about some of the signs of a slowdown we saw in the third quarter numbers.”
But, Guatieri said the Bank of Canada could put a larger emphasis on the central bank getting close to ending its tightening cycle, which “would open the door for one more rate move in early next year.”
RISK OF A RECESSION
Bank of Canada Governor Tiff Macklem has said he expects a significant economic slowdown, but not a severe recession in the coming quarters.
“We expect growth to stall in the next few quarters—in other words, growth will be close to zero,” Macklem said in a speech at the Public Policy Forum in November.
“That means two or three quarters of slightly negative growth are just as likely as two or three quarters of slightly positive growth. That’s not a severe recession, but it is a significant slowing of the economy.”
Shenfeld said he agrees with the Bank of Canada’s outlook.
“We're going to hover on a tight rope, very close to recession,” he said.
“Our actual forecast is for a stall in growth for a few quarters rather than an outright recession, because there are some hopeful signs that on a global basis inflation is decelerating and we might not need an outright recession to get the cooling and inflation that the central bank wants to see.”