Hike rates

Bank of Canada to raise rates this month, JP Morgan says

JP Morgan economists expect the Bank of Canada to raise its benchmark interest rate at its Jan. 26 meeting, ahead of the central bank’s own take-off schedule.

“Based on the Bank of Canada’s rhetoric in December, it was clear that labor market dynamics and outperforming economic data had raised concerns at the Bank that the output gap was closing further. faster than expected,” wrote Silvana Dimino, a New Yorker. economist based at JP Morgan, in a report to clients on Tuesday.

Dimino sees the Bank raise its benchmark rate by 25 basis points to 0.5% in January; his team had previously called for the first move in April. It expects there to be five rate hikes this year, which would take the benchmark rate to 1.5% by the end of the year.

It also expects the Bank to begin a modest balance sheet liquidation in the second half of this year.

At midday on Wednesday, overnight index swaps pegged the probability of a January rate hike in Canada at 46%.

In October, Bank of Canada Governor Tiff Macklem indicated he would not tighten policy until the economic recovery was complete – which he expected to happen. this year’s “middle neighborhoods”. But data since then suggests the economy has outperformed.

“We believe the Bank will see the risks to the outlook and the output gap and opt for faster policy recalibration,” Dimino wrote. “The recovery and continued growth in the labor market after the severe provincial shutdowns last spring has been nothing short of remarkable.”

Canada recorded its seventh straight month of job growth in December, and while recently renewed COVID-19 restrictions will weigh on the labor market in January and possibly February, Dimino said she believes it will be temporary.

“We expect the virus-related disruptions and any impact on confidence to be short-lived; the rise in cases already appears to be slowing. While the Bank has cautiously acknowledged the uncertainty surrounding past waves, the playbook has generally been to consider the temporary nature of any impact on activity,” she said.

However, Capital Economics presented a different view to clients on Wednesday, predicting that the Bank will wait until the new restrictions are eased before triggering take-off. His team expects rates to start rising in March or April.

“While most advanced economies are in the midst of an Omicron wave, Canada stands out for the scale of the restrictions that have been reimposed,” Stephen Brown, senior Canadian economist at Capital Economics, wrote in a note Wednesday. .

Brown also pointed to the Bank’s commitment to an inclusive labor market, which has yet to be fully achieved despite strong employment numbers.

“Ultimately, there is reason to believe that the Bank faces less immediate pressure to increase than some of its peers. Non-energy and food prices rose at a relatively moderate pace in October and November, in contrast to the acceleration in the United States. Unlike in the United States, wage growth is also still below pre-pandemic rates,” he said.