Canadians might see much higher borrowing rates in the not-so-distant future. Scotiabank chief economist Jean-François Perrault has forecast up to 8 rate hikes within 2 years. He sees elevated inflation backing the Bank of Canada (BoC) into a corner on the issue. Inflation appears to be a lot less transitory than thought. If that’s the case, the central bank will be forced to move, and address the highest inflation rate in decades.
Canadian Interest Rates Forecast To Rise 200 Basis Points
The bank’s economists are calling a very sharp climb for Canadian interest rates. They have forecast an increase of 100 basis points (bps) in the second half of 2022. It would be followed by another increase of 100 bps in 2023. An overnight rate of 2.25% would be the highest Canadians have seen since 2008.
A “full hike” is often considered 50 bps, which means this can translate into 8 hikes. Since they only see this beginning in the second half of next year, that’s up to 8 hikes in 6 quarters. It’s a bold call for a bank not exactly known for making aggressive calls.
Inflation Is Forcing The Bank Of Canada To Respond
The aggressive hikes aren’t to address soaring home prices or aggressive credit growth. It’s due to inflation. High inflation gives a central bank few options outside of a rate hike. Unlike hiking rates to address home prices, it can’t just be delayed at the expense of a single generation. High inflation erodes national wealth, and threatens the credibility of the currency.
“We still view the supply disruptions as temporary, but they are clearly more persistent,” wrote Perrault. Adding, “muddying the inflation outlook further is an increasingly blurry distinction between supply-related challenges and those posed by strong demand.”
“Even if ocean shipping costs were to normalize, there is a shortage of transportation and warehouse workers to handle the volume of goods being shipped within and across countries.”
Rates Can Climb Even Higher If Inflation Rises Further
The forecast, as ambitious as it is, doesn’t discount the overnight rate may need to climb even higher. “If inflation rises more rapidly than we expect, we may need to forecast an earlier tightening along with a potentially higher 2023 endpoint,” he said.
The forecast might be tough to see from here, but the general trend is fairly common these days. Elevated inflation is now seen as less temporary, with the central bank out of touch with reality. Since prices are set by expectations, the BoC has stuck with repeating the narrative. That’s no longer working, with their own research showing fewer people believe them.
The longer it takes the BoC to acknowledge inflation isn’t transitory, the worse it will be. Desjardins said earlier this year, a delayed reaction means it needs to be stronger. This greatly increases the odds of a policy over (or under) reaction. It appears Scotiabank agrees, the BoC waited until it needed to push rates a lot higher, over a short period of time.
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