Bank of Canada set for another supersized hike even as outlook darkens

OTTAWA  – The Bank of Canada is widely expected to raise rates by another three-quarters of a percentage point to a fresh 14-year high, as stubbornly broad and persistent inflation outweighs worries that the rapid pace of tightening will trigger a recession.

Five of Canada’s six largest banks are forecasting 75-basis point hike to 4 percent after inflation data last week came in hotter than forecast, with one instead calling for a 50-bp move when the decision is released at 10 a.m. ET (1400 GMT).

Money markets see a roughly 70 percent chance of the larger increase and are betting the policy rate will peak at 4.5 percent next spring.

“Another chunky 75-bp rate hike is likely coming… and policymakers aren’t ready to back off one iota yet,” said Benjamin Reitzes, Canadian rates & macro strategist at BMO Capital Markets, in a note.

The Bank of Canada has hiked its policy rate by 300-basis points since March, making it one of the most aggressive major central banks and an eye-watering pace that has led to mounting worries Canada’s economy will slip into a recession.

The central bank will release updated economic projections on Wednesday, which are expected to show a far dimmer outlook for both the Canadian and global economies, along with some hints of improvement on the inflation front.

“I think we’re going to see them forecasting the down shift in growth that they were aiming to achieve and the narrowing of the positive output gap,” said Simon Harvey, head of FX analysis at Monex Europe and Monex Canada.

“I don’t think we’re necessarily going to see the Bank of Canada factoring in a recession as their base case, I think instead they’re going to forecast a stagnant period of growth,” he added.

Inflation, meanwhile, edged down to 6.9 percent in September from its peak at 8.1 percent in June. That is better than what the central bank expected back in July, when it forecast inflation would average around 8 percent in the middle quarters of 2022.

But analysts still see the path back to 2 percent as long and choppy, with a return to target sometime in the second half of 2024. And near-term inflation expectations remain a concern, making it likely Bank of Canada Governor Tiff Macklem will stay hawkish, at least for now, said analysts.

“Macklem may not be close to a pivot yet, but it’s worth reiterating that central bank statements have short shelf lives,” said Andrew Kelvin, chief Canada strategist at TD Securities, in a note.

“He may be more circumspect by the start of December.”