Economists weigh in on BoC's future rate hike path

One thing appears a sure thing: further increases are on the way

Economists weigh in on BoC's future rate hike path

Record-low interest rates lit the fuse on a nearly two-year pandemic housing boom in Canada in 2020 – but as the Bank of Canada and major lenders continue to raise rates this year, it’s anybody’s guess where they’ll eventually end up.

That red-hot market has become a distant memory, with the central bank’s latest announcement meaning its trendsetting interest rate has now risen by a full 3% in 2022 thanks to five consecutive hikes.

While there had been some speculation that the Bank would call it quits on interest rate jumps for 2022 after its September announcement, its frank assessment that rates would need to rise even further indicates that more are on the way.

Many weary homeowners who have witnessed their monthly payments spike dramatically in recent months, and would-be buyers now seeing their qualifying rate creep upwards, find themselves wondering when that series of rate jumps will come to an end and stability arrives.

A consensus appears to have emerged among economists that another rate hike is inevitable in the central bank’s next policy rate announcement, scheduled for October 26.

Royal Bank of Canada (RBC), which prior to the Bank of Canada’s latest announcement had anticipated one more rate hike this year, now believes a 50-basis-point increase will arrive in October, followed by a quarter-point jump in December. That would bring the overnight rate to 4% by year end, higher than the 3.5% RBC had previously predicted.

Read next: RBC: Softer landing for Canadian economy growing more unlikely

Canadian Imperial Bank of Commerce (CIBC) World Markets deputy chief economist Benjamin Tal told Canadian Mortgage Professional that he also believed a 0.5% increase would take place at the central bank’s next rate announcement.

Doug Porter (pictured top), chief economist at Bank of Montreal (BMO) Capital Markets, said the bank estimates that the Bank of Canada is likely to raise rates by another half percentage point in total in 2022 – whether in a single move in October, or separate quarter-point increases next month and in December.

“We’re leaning to a half-point move in October and then they’ll take it as things unfold, but we do think that’s possibly the last move for now,” he told CMP. “My next best guess would be a half-point move in October, and then a quarter-point move in December to take the overnight rate up to 4%.”

The central bank deliberately left itself with a considerable amount of flexibility by indicating rates would need to rise further, Porter said, although he noted that its future decisions would be influenced primarily by how quickly inflation continues to decline.

“The one concern I have lingering in the background is that we’re all underestimating the power of underlying inflation and underestimating the possibility that the Bank will have to hike rates more than anybody currently expects,” he said.

Read next: A rough road lies ahead for the Canadian economy, says former BoC official

“Even when you look back three months ago, nobody was calling for the Bank to hike rates up close to 4%, such as most people are now expecting. So, things still have the power to surprise, and I’m certainly not 100% confident that the market and all the economists have this quite right just yet.”

On the Scotiabank side, vice president and head of capital markets Derek Holt said in a bank publication that a 0.5% hike was to be expected in October, but that “incoming information between now and then may further inform the likely bias.”

New pledges unveiled by the federal government to spend $4.5 billion on cost-of-living measures could have an impact on the Bank’s plans for interest rates, Holt said in a note to clients this week, with the likelihood that its benchmark rate will now have to move higher than 4%.

TD Securities chief Canada strategist Andrew Kelvin echoed that sentiment in a note, saying that while so-called oversized hikes were unlikely to arrive during the remainder of the year, three consecutive 0.25% increases could be announced in October, December, and January.

“The [Bank of Canada’s] hawkish ambiguity implies a wider range of potential terminal rates for Canada,” he said. “We see anything from 3.50% to 4.75% as plausible, and think a [4%] terminal rate strikes a nice balance of maintaining BoC credibility and not unduly burdening the household sector.”