BoC to hike once more before year-end and no easing before 2025: Earl Davis
One markets expert thinks the Bank of Canada will hike interest rates at least once more in 2023, but won’t raise them again next year.
Earl Davis, head of fixed income and money markets at BMO Global Asset Management, told BNN Bloomberg that he believes “2023 is the end of hikes,” but stubborn inflation will keep rates higher for longer.
“Rates are going higher because (the Bank of Canada) said they need to fight inflation and ensure inflation stays down,” Davis said in a Tuesday television interview.
“Unfortunately, the only tool that they have to do that is interest rates.”
The Bank of Canada’s key interest rate has been set at five per cent since July – the highest it’s been in more than two decades. The bank’s next rate decision is scheduled for Oct. 25.
Davis said that although some metrics show inflation is approaching the central bank’s two per cent target, base effects show inflation growing compared to 2022.
“That is one of the things that underscores our call for at least one more hike, possibly two,” he added.
Davis said the effects of earlier rate hikes have started to be seen in the economy, pointing to slowed overall growth and negative GDP in the second quarter.
He added that the effects of more recent hikes will also take time to show up. For that reason, he expects the Bank of Canada will opt to hold rates next year.
“We don't foresee any hikes in 2024,” Davis said. “That speaks to the lag – give it a little bit of time to see the lag.”
‘THE ECONOMY IS ALRIGHT’
Davis says that despite fears of a looming recession, he thinks Canada’s economy is headed for a soft landing.
“I think the economy is alright, and I think it will continue to do alright for 2024,” he said.
Davis added that going into next year, central bankers and economists are primarily going to be looking at employment numbers, which will indicate whether the Bank of Canada will need to adjust their strategy and possibly bring rates down.
“The number one thing that we're looking at is employment, not economic growth, and that's where the difference comes in. That's why we're not seeing the pullback yet,” he said.
“For us to change our call to say maybe there'll be an ease in 2024, we have to see the unemployment numbers going higher, and we're not seeing that.”
Davis said that in the long run, he expects Canada’s economy to continue to slow gradually, and that he doesn’t foresee a “cliff effect” in 2024.
He added, however, that economists will need to re-evaluate in the fall of 2024, as Canada’s economic outlook may shift dramatically depending on the outcome of the U.S. presidential election.
“There won't be any significant deterioration,” he said, “but depending on who comes into power, 2025 could be a different story.”