What do large investment managers predict in terms of central bank’s rate increases?

The central bank may begin its cycle of interest-rate increases as soon as this week already, marking the first rise since 2018. Many economists and traders believe the Bank of Canada will raise its key lending rate by 0.25% on Wednesday, and more hikes are expected.

So how far can the BoC go in 2022 amid inflation growth showing the fastest results in 30 years? Bloomberg surveyed investment managers on this issue.

The swaps market predicts approximately 6 rate increases during the next 12 months. However, it could be “slightly more than what we actually get,” says Vinayak Seshasayee from Pacific Investment Management Co.

According to Pimco, the BoC will raise its overnight rate four times in 2022 – just like the U.S. Federal Reserve. Macklem has more tools for tightening, e.g. reducing the balance sheet, Seshasayee noted, and there are additional factors that will prevent the Bank of Canada from raising rates too high or too fast.

“Canada has offset a lot of jobs, but when you look at the labor market from another angle, you’ll see there’s still strong slack in it, especially in terms of total hours and work productivity,” – Seshasayee said. Moreover, Canadian households show extremely high debt levels, making the economy vulnerable to rate increases.

Strong economic growth and easy policy in the U.S. has provided Macklem with some space to raise the rates, said Tom Reithinger from Capital Group.

“The central bank has tended to be more hawkish because Canada took advantage of the easy monetary policy in the U.S.,” Reithinger noted. “This usually works in case of smaller open economies with big neighbors.”

In his opinion, the BoC will start raising rates in Q1: either on Wednesday, or on March 2.

According to Avi Hooper from Invesco Canada Ltd., Canada’s economy has exceeded expectations recently.

“The recovery has accelerated faster than any economist, including us, would have expected,” – Hooper said. That has led the national economy back on similar track that we’ve seen before the pandemic, when the BoC’s policy rate was 1.75%.

At the same time, Hooper warns that the Bank’s decision will depend partially on what happens in the U.S. “The Bank of Canada doesn’t plan to detach itself from the path of the U.S. Federal Reserve significantly. Why should it? We’re on the same economic cycle.”