Some economists are starting to lean toward a Bank of Canada hike, either in June or July, as evidence mounts that the housing market is gaining momentum and inflation is proving stubborn.
(Bloomberg) — Some economists are starting to lean toward a Bank of Canada hike, either in June or July, as evidence mounts that the housing market is gaining momentum and inflation is proving stubborn.
Bank of Nova Scotia became the first of Canada’s six largest lenders to forecast a 25 basis-point rise in the overnight rate to 4.75% at the next central bank meeting on June 7. Citigroup Inc.’s Veronica Clark had previously made the same call.
Capital Economics now expects an increase at the July meeting, and says a quick resolution to the US debt ceiling impasse could spur hikes at each of the next two meetings. That would take the policy rate to 5%, where it hasn’t been since 2001.
The shift follows two key economic releases pointing to a rapid turnaround in the housing market and an unexpected reacceleration of inflation — led by shelter costs — after policymakers paused their tightening campaign for two straight meetings. For some economists, the housing sector’s resilience and sticky consumer prices outweigh other data that showed households under financial stress and a slowdown in consumer spending.
A rate hike or two is needed for the “psychological effect” of shocking individuals and businesses and showing that the bank is committed to getting inflation back to its 2% target, Stephen Brown, an economist at Capital Economics, said by phone. While household vulnerabilities — especially high consumer debt — will likely prevent substantial tightening, “it now seems likely that the bank will raise interest rates at least once more as a so-called insurance hike,” he said in a report to investors.
So far, only two out of 29 economists in a Bloomberg survey expect a 25 basis-point increase in June; the rest are forecasting rates to hold steady. The consensus is that the Bank of Canada will keep its policy rate at 4.5% through the end of 2023.
Read More: Canada Economic Forecasts in May 2023
But even among those economists who still think the central bank will stay on hold, there is a sense the tide may be shifting.
“We readily recognize the case for additional rate hikes, with the July 12 decision date a very likely candidate,” Douglas Porter, chief economist at Bank of Montreal, said in a note. “Our official call is that the bank (and the Fed) will keep rates steady at current levels through the remainder of the year. But the risks of further moves are growing.”
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