BoC: Interest rate likely to reach 2% by October – RBC

On Wednesday, the Bank of Canada, as expected, increased the key interest rate by 50 bps to 1% and also announced the beginning of quantitative tightening. Analysts at RBC, point out the BoC doesn’t provide an expected path for policy rates but they consider Governor Macklem gave some guidance at his press conference, “noting Canadians should expect the overnight rate to rise toward the bank’s assumed 2-3% neutral range.”

Key Quotes: 

“The Bank of Canada accelerated its tightening cycle today, building on March’s 25 bp rate hike with a larger, 50 bp move that lifts the overnight rate to 1%. The bank also said it will begin quantitative tightening (QT) later this month, shrinking its balance sheet by ceasing reinvestment of maturing GoC holdings. With 40% of its holdings maturing in the next two years, QT will reduce the size of the bank’s balance sheet relatively quickly. That move has been well telegraphed, though, and increases in the overnight rate—which the BoC emphasized is its main policy tool—will be more impactful for financial conditions going forward.”

“Today’s 50 bp move, the first hike of that magnitude in 22 years, suggests the BoC has lost the patience it demonstrated back in January when it took a pass on raising rates.”

“Our forecast assumes more standard, 25 bp hikes going forward—until the overnight rate hits 2% in October—though we think another 50 bp increase will be an option on the table in June.”

“While today’s meeting suggests upside risk to our forecast for the BoC to halt its tightening cycle at 2%, we continue to think the market is over-priced for rate hikes in 2023 when the bank will have to balance growth risks (which we view to the downside relative to today’s forecast) with inflation that should be moving toward its target, if not quite fast enough.”