By Ketki Saxena
Investing.com -- The Bank of Canada is set to issue another policy interest rate tomorrow at 10 am ET. The statement and Monetary Policy Report including fresh forecasts will be followed by a full press conference hosted by Governor Macklem and Senior Deputy Governor Rogers at 11 am ET.
Currently, markets are pricing in three-quarters of a percentage point hike, which would bring the benchmark rate to 4% from the current 3.25%
James Orlando, Director & Senior Economist TD (TSX:TD) - who also expects a 75 bps move from the Canadian central bank - believes the Bank of Canada needs to remain hawkish due to the increased risk of inflation expectations becoming entrenched.
“This should keep the BoC's tone very hawkish as it needs to cement pricing for higher interest rates in order to bring down expectations for future inflation
He cites still high headline inflation at 6.9%, as well as the Bank of Canada’s business and consumer surveys which showed expectations for future inflation remain high.
Scotiabank’s Vice President and Head of Capital Markets Economics, Derek Holt also believes the bank will continue to front-load its policy with a 75 bps move tomorrow in order to prevent inflation expectations from becoming embedded.
He notes “The speed and magnitude of rate hikes is because central banks totally misjudged inflation risk and are scrambling to thwart its institutionalization and prevent it from becoming embedded in attitudes including wage-setting exercises.”
To prevent “this next stage of transmission effects from taking root”, the Canadian central bank is bent on “Invoking as much damage in as short a period as possible”.
Economists at RBC (TSX:RY) meanwhile see a 50 basis point increase next week to take the overnight rate to 3.75%, though acknowledges that “risks remain that the central bank could go bigger: markets are currently leaning toward a 75 basis point increase.”
RBC’s Chief Economist Nathan Janzen also acknowledges that “inflation isn’t likely to return fully and sustainably to the central bank’s target range of 2-3% until the economy slows further”
In terms of what’s next, economists expect the Canadian central bank to walk a narrow path. Andrew Granthan, Senior Economist at CIBC (TSX:CM) Capital Markets, writes that although inflation remains high, “The central bank can’t continue hiking interest rates indefinitely in response to above-target inflationary pressures”.
While he believes that next week the BoC will hike rates by 75 bps and remain hawkish next week, it will be forced to pivot soon.
Grantham writes, “the Bank of Canada will soon face the difficult task of changing its narrative and signalling a pause in this rate hike cycle, at a time when inflation is still very high”.
The choice is either to leave inflation untamed by prematurely pausing rate hikes, or continuing to slow the Canadian economy until - eventually - inflation is back to target.
The additional challenge is that the Bank of Canada must pace itself in accordance with the Fed. Robert Kavcic Senior Economist and Director of Economics at BMO (TSX:BMO) notes, “The Bank can only fall so far behind rising Fed tightening expectations without putting even more downward pressure on the loonie, which becomes, even more, inflationary”.
“The Bank might not have the luxury of easing off the tightening brakes when it would otherwise want to.”