Major economists make conflicting rate forecasts after the Bank of Canada decision

On Wednesday, the Bank of Canada decided to keep its overnight rate at 0.25%, reiterating that its first post-pandemic rate increase may happen in the “middle quarters” of the next year.

Although such a decision didn’t surprise any Bay Street economists, the BoC itself was surprised by the new Omicron variant, which was first found not long before its final meeting of 2021.

According to the central bank, the national economy has enough pace and power to withstand the still-unknown threat of Omicron, as well as the on-going supply chain issues.

Here’s how major economists from Bay Street have reacted to Governor Tiff Macklem’s decision:

Josh Nye, senior economist at RBC

The central bank was restrained by Omicron uncertainty, but today’s statement shows that in case this threat doesn’t intensify during the next seven weeks, the Bank will sound more active in January. Now, markets are pricing about 50/50 odds of a rate increase next month, but in our opinion, the BoC will probably only hint at upcoming rate increases rather than actually raise the rate in January.

Derek Burleton, deputy chief economist at TD

I believe the next significant step before quantitative tightening will be an interest rate hike. It does look like the scenario they are following. We’ll keep a close eye on the Omicron situation, as there’s still uncertainty about it. I think most central banks will choose this stance in the nearest future, until we get a clearer picture of the issue. In case there are no major negative results from the scientific studies, a rate increase January is still possible.

Earl Davis, head of fixed income and money markets at BMO Global Asset Management

The market has already discounted many rate increases over the next few years, and it’s seen in mortgage rates and for those who are entering the market right now. The most typical mortgage term in Canada is a five-years term, so people have slightly more certainty. The BoC have a heightened awareness of the real estate sector, but the concern level today is moderate.

Karl Schamotta, chief market strategist at Cambridge Global Payments

In case the rates start going up and we see expectations of a faster growth pace, it will take a lot of heat out of the real estate market. Such a change will put downward pressure on resale activity, building, market speculation, and the strongest factor that will happen there is a psychological hit. Canadians will not feel extremely rich, so they won’t be consuming at the same level they are today.

Avery Shenfeld, chief economist at CIBC Capital Markets

The central bank’s latest statement still points to the uncertainties over the pandemic and the Omicron variant. With the potential influence on household behavior, that should be enough to forget about a rate hike in January. However, if the winter COVID wave fades out, as some epidemiologists predict, the Bank will be ready to act. With the first increase possible in April, we expect about 1.5% in total rate hikes during 2022-23.

Doug Porter, chief economist at BMO Capital Markets

It’s difficult to find a strong hint at the first rate increase in April in the Bank’s statement. Nevertheless, with the ongoing inflation growth, an almost full recovery in employment markets, active housing sector, and a well-behaved currency, April does look like the starting point for an increases cycle.

Frances Donald, chief economist and head of macro strategy, Manulife Investment Management

This central bank wants to raise rates. They keep telling us that Canada’s economy shows good results. Today, we heard from the BoC that the labour market has already offset all of its slack, that there’s still a lot of inflation in the system – it suggests the Bank wants to start raising rates, but it tells us it will probably not do it until the middle of the year. It’s quite possible we’ll see one or two increases next year. At the same time, the market is pricing in almost five hikes from the BoC and only one or two in case of the U.S. It’s very easy to say that more than five increases in Canada are unlikely. In the U.S., such hawkishness isn’t expected, there’s a big divergence in markets’ forecasts. And I believe we’ll see also a big divergence in terms of what central banks of these countries will decide in the end.