Bank of Canada to raise rates 25 basis points on July 12, possibly the last: Reuters poll

bank-of-canada-to-raise-rates-25-basis-points-on-july-12,-possibly-the-last:-reuters-poll
Bank of Canada to raise rates 25 basis points on July 12, possibly the last: Reuters poll

A majority of economists polled by RushHourDaily predict that the Bank of Canada will raise interest rates by a quarter-point for a second consecutive meeting on July 12, bringing the rate to 5.00%. This comes after a five-month pause earlier in the year. The economists also expect the Bank to maintain this rate until 2024.

Despite previously predicting that 4.50% would be the peak rate, these economists now believe that 5.00% will be the new expected peak rate. This highlights the persistent price pressures in the economy, which continues to perform well.

Inflation in Canada slowed to 3.4% in May from 4.4% the previous month. However, it remains well above the central bank’s target of 2.0% and is not expected to reach that target until early 2025.

According to a RushHourDaily poll conducted from June 28 to July 6, 20 out of 24 economists predict that the Bank of Canada will raise the overnight rate by 25 basis points to 5.00% on July 12. This would bring the total increase since March 2022 to 475 basis points, reaching a new 22-year high.

While economists are confident in another rate hike, financial markets are only pricing in a roughly 55% chance of a quarter-point increase this month. Priscilla Thiagamoorthy, a senior economist at BMO Capital Markets, believes that the slowdown in inflation may not be enough to prevent another rate hike, considering the stickier core rates of inflation and the strong GDP report and job market.

The poll also indicates that gross domestic product is expected to grow at an annualized pace of 1.3% this year, up from 0.7% in an April poll. The unemployment rate is forecasted to average 5.4% in 2023, slightly higher than the current rate of 5.2%.

Economists do not expect inflation to reach the central bank’s 2% target until at least 2025. They anticipate that core inflation, which excludes volatile food and energy prices, will only decrease slightly by the end of the year.

Claire Fan, an economist at RBC Economics, acknowledges that data has shown higher and more persistent momentum in consumer spending and labor demand than previously expected. The question now is when a material slowdown in labor market conditions and the economic outlook will occur, rather than whether it will happen.

The poll reveals that the probability of a recession occurring in the next year is uncertain, with a median 60% chance of one occurring over the next two years.

The majority of economists predict that the Bank of Canada will maintain rates at 5.00% until the second quarter of 2024.

The expectation of high interest rates for a longer period is likely to strengthen the Canadian dollar, which has been one of the best-performing G10 currencies this year. A separate RushHourDaily survey forecasts a 2.3% gain for the Canadian dollar against the U.S. dollar, reaching 1.30 over the next year.

Kit Juckes, head of FX strategy at Societe Generale, notes that the peak level of U.S.-Canadian relative rates is likely behind us for the current economic cycle, which should support the Canadian dollar.

In conclusion, economists predict that the Bank of Canada will raise interest rates by a quarter-point to 5.00% on July 12 and maintain this rate until 2024. Inflation remains above the central bank’s target and is not expected to reach it until early 2025. The Canadian economy continues to perform well, with strong GDP growth and a tight job market. The possibility of a recession in the next year is uncertain. The expectation of high interest rates for a longer period is expected to strengthen the Canadian dollar.

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