The Bank of Canada’s surprise and colossal 100 basis point rate hike signaled that inflation has become entrenched and policymakers are still lagging behind when it comes to reining in runaway prices. However, it seems that the central bank is far from having completed its tightening: according to BMO, the overnight rate could reach 6% by next year in order to beat inflation.
“The cure for inflation is a recession,” Earl Davis, head of fixed income at BMO Global Asset Management, told Bloomberg. He said the bank’s one-percentage-point increase signaled that policymakers are moving towards an acceleration of the timetable for terminal rates, which could rise from the current 2.5% to 4% by the end of the year. end of the year over the duration of the other three. meetings.
Going forward, Davis said markets don’t price in that central bank monetary policies typically need to outpace the rate of inflation, which means borrowing costs will likely rise by 2 percentage points. by 2023 assuming the current inflation rate drops to around 5%.
Davis cited inflation rates south of the Canadian border, which hit a staggering 9.1% in June, surprising both markets and policymakers. Higher-than-expected consumer prices in the United States are like a “canary in the coal mine for Canada” as Canada is even more susceptible to higher inflation given a weaker dollar relative to to its American counterpart.
But, as Davis points out, with the Bank of Canada removing the word “forcefully” from its statement, the peak of colossal rate hikes has likely been passed. “Removing ‘forcefully’ means it’s as powerful as possible for independent rate hikes.” Thus, the resulting increases in borrowing costs will most likely remain below 100 basis points during the remaining policy meetings.
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