Rate hikes looming larger, Scotia says

In the wake of a series of strong economic data, Scotiabank Economics sees rate hikes on the horizon sooner rather than later.

In a new report, the bank’s economists said they now see the Bank of Canada starting to raise rates with a 25 basis point increase in April. It previously expected the central bank to start hiking in July.

The earlier than expected move reflects rising wages and strong inflation, the report said.

All told, Scotiabank sees four 25 bps rate hikes in 2022, moving rates up by 100 bps in total, and another 100 bps coming in 2023.

The omicron variant poses some short-term uncertainty, but “upside risks to the rate forecast dominate,” it said.

At the same time, growing concern about inflation in the U.S. is pushing up rate hike expectations there too.

“We have brought forward our expected rate increases from late-2022 to mid-2022, with 100 bps of tightening expected in the year,” Scotia said of the U.S. Federal Reserve.

In addition to the shifting economic fundamentals, the report said that Scotia’s also “increasingly concerned” that the Bank of Canada’s’s current inflation control mandate may be changed by the government.

“As much as we do not think the mandate should change — a view that is strengthened by recent inflation and labour market developments — we have to acknowledge that the odds of a change increase with each passing day,” the report said.

This, in turn, adds uncertainty about how the central bank will react to incoming data.

“Will the BoC be more tolerant of inflation overshoots? Will it formally give more weight to labour market information in its decision process? If so, could that force the BoC to, perhaps perversely, pursue a more aggressive withdrawal of stimulus given current conditions in the labour market,” the report said.

“The potential impacts of a change seem underappreciated by analysts, perhaps because they expect no changes to the mandate,” it said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.