Last Wednesday, the Bank of Canada will announce its most recent interest rate decision, and most economists believe that rates will once again be held steady.
Although there have been increasing calls for a potential increase this week and even more so for July, the overnight lending rate has been frozen at 4.50 percent since January. However, the general view among economists polled by Bloomberg is for a rate pause in June.
In a note to clients on Monday, Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO Capital Markets, said, “We lean to a pause this week, but wouldn’t be astonished if they chose to hike.
He cited growing housing activity and Canada’s robust gross domestic product (GDP), which rose at an annualized rate of 3.1% in the first quarter of 2023, as important economic data points the bank will take into account before making its decision on Wednesday.
Reitzes warned that additional tightening would be required if the economy continued on its current course and exceeded the bank’s target inflation rate of 2%.
Since the economy isn’t anticipated to collapse significantly over the next six weeks, BMO is now predicting a 25-basis-point increase in July, he added.
Although they expect a greater likelihood of rate increases in the future, Desjardins’ economists are also advocating for a rate pause this week.
In a letter to clients on May 31, Royce Mendes, managing director and head of macro strategy at Desjardins, stated that “the belief that the central bank will further tighten policy this summer is justifiably gaining traction.”
The RBC economists have likewise adopted this stance.
In a note to clients on June 2, RBC economist Claire Fan stated that “further evidence that higher interest rates aren’t slowing the economy as expected would tip the scales towards a hike in July.”
Fan reasoned that the BoC will likely hold rates for the time being while it waits to see additional information on inflation and the Business Outlook Survey.
At 4.4% yearly in April, Canadian inflation was more than anticipated.
We believe the BoC will ultimately maintain the suspension of rises that started in January, keeping the overnight rate the same at 4.5%, she said.
CALLS FOR A JUNE HITCH
Three eminent economists are urging a rate increase on Wednesday.
Veronica Clark, an economist for Barclay, was the first to advocate for a 25-basis-point increase in June.
The runaway inflation, which is significantly greater than the bank’s inflation goal rate, she claimed, was not being contained adequately.
Jean-François Perrault, the chief economist at Scotiabank, sees April’s higher-than-expected inflation as a wake-up call for the BoC.
“The risk of not doing enough effectively implies that inflation doesn’t come down as much as we want and that at the end of the day, you might need to do even more on the rate side, later on, to bring inflation down,” he said in a TV interview on May 23.
Stephen Brown, a senior economist with Capital Economics for Canada, joined them.
In a letter to clients on May 31, Brown stated, “We now estimate that it will hike interest rates next week rather than wait until July. Both GDP growth and CPI inflation have shocked the upside of the Bank of Canada’s predictions.
Brown believes that the market significantly underestimates the amount by which the bank may raise rates, particularly if it does so this Wednesday, and expresses a hawkish mood.
He issued a warning that the bank might increase the policy rate to 5% by July.
