Inflationary pressures will continue to be the major factor affecting these dynamics well into next year, bank says
Despite recent economic data being “firmer than expected”, Royal Bank of Canada is anticipating a consistently softening backdrop up to the end of the year for the North American economies.
“Each of these economies is expected to enter recession in the coming months if they’re not already there,” said Josh Nye, senior economist at RBC. “Given our generally below-consensus economic forecasts, we think central banks will ultimately under-deliver relative to market expectations, which should see government bond yields peaking in the near-term.”
Inflationary pressures will continue to be the major factor affecting these dynamics well into next year, RBC warned.
“More persistent inflation that forces policymakers to continue tightening further into 2023 remains a key risk (upside for rates, downside for growth),” Nye said.
However, Nye said that market players and observers are overestimating the BoC’s reactions to the US Federal Reserve’s policy decisions “particularly after it charted its own course in October.”
“While we’ve lifted our terminal Fed funds forecast by 25 bps (to 4.75-5%), our BoC call is unchanged (4.00% terminal),” Nye said. “That end-of-cycle gap would be at the higher end of the range seen in recent tightening cycles – the Fed consistently going further – whereas market pricing is at the lower end. That suggests downside risk to the Canadian dollar, in line with our forecast for further near-term depreciation.”