CIBC predicts the Bank of Canada’s next rate hike will be the last of the cycle, but others aren’t so sure

The Bank of Canada’s long-awaited rate-hike announcement in early September could be the last for a while from central bank Governor Tiff Macklem, CIBC predicts. But others are not so sure.

Some economists say the rate hike cycle will stop after the Sept. 7 announcement, while others predict hikes could continue into next year, with the target rate hitting 3.75 percent.

However, financial experts generally agree that the path the central bank chooses will have a significant impact on the financial health of the average Canadian and the economy as a whole, and could determine whether the country heads into recession or falls into recession. entrenched in a period of high inflation.

“The problem for a central bank is that it’s trying to land a fighter jet on the deck of an aircraft carrier,” said CIBC chief economist Avery Shenfeld. “There’s a very small margin of error in either direction, and they need to get it right.”

In an Aug. 22 note to clients, Ian Pollick, managing director and head of fixed income, currency and commodity strategy at CIBC, said a “narrative shift” is coming.

“Given that, we forecast that the bank will end its rate hike cycle at its next meeting in September, raising the overnight rate 75 basis points to 3.25 percent,” he wrote in the note.

Shenfeld said CIBC’s prediction that rate hikes will end soon is based in part on the fact that the central bank appears to bring rate hikes forward.

“Their efforts have been to raise rates rapidly and then allow the economy to start to slow to reduce inflationary pressures,” he said.

As markets begin to cool, Shenfeld expects the central bank will closely monitor the labor market, particularly job growth, for signs that inflation is on a downward trajectory. As such, the bank is unlikely to explicitly say in its Sept. 7 announcement that rate hikes are over, he said, noting that the central bank is more likely to shift to a “wait-and-see stance.”

At Desjardins, managing director and chief macro strategist Royce Mendes believes a pause in rate hikes is possible after the September announcement, but is less confident than CIBC economists, stressing there is still a “high degree of uncertainty” in the market.

If the rate-hike cycle ends, it would be because the bank feels “the rate hikes it has already made will be enough to cool inflation and bring it back to the two percent target in a reasonable time frame,” he said. .

However, Mendes said it often takes six to eight quarters for the economy to see the impact of central bank monetary policies. In addition, he said, there are a variety of other factors, from the pandemic to the war in Ukraine involving major energy and food producers, that will make it difficult for the bank to accurately predict the impact of its previous rate hike decisions.

Another possibility, Mendes said, is that the bank will raise rates further in October before cutting them in the new year.

“In reality, they may want to err on the side of too many rate hikes rather than too few, because the risks of not controlling inflation by making too few rate hikes far outweigh the risk of tightening monetary policy too much. by making too many and cooling the market. the economy too much,” he said.

Douglas Porter, chief economist at BMO, predicts that the rate hikes will last until the end of this year. They could possibly extend into the new year if supply chain issues persist and there is another spike in energy and food prices.

In addition to a forecast 75 basis point increase in the overnight target rate in September, financial markets expect two more hikes, of 25 basis points each, in October and December, Porter said.

“We are skeptical that inflation will go away quickly,” Porter said. “We’re still probably going to be above seven percent in headline inflation (for August) and that’s too high for anyone’s comfort, and it means the bank can’t relax.”

Despite a lack of consensus on when the hikes will end and how high they will peak, experts say a pause in rate hikes after September will be a relief for some Canadians but may also lead to a high entrenched inflation.

For those with adjustable-rate mortgages, a pause in rate increases will help some, said RATESDOTCA managing editor John Shmuel, but noted that many will continue to struggle if rates stay this high.

“For anyone who has an adjustable-rate mortgage, over the course of the year you’ve seen your rate increase at one of the fastest rates we’ve seen in decades,” he said. “Now the question is whether these new higher interest rates are here to stay.”

Porter warned, however, that a premature end to rate hikes could lead to entrenched high inflation.

“So I doubt they’re going to make definitive statements until they’re pretty sure inflation is turning around across the board.”

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