BMO: Bank of Canada Could Hike Rates as High as 6% to Tame Inflation

The Bank of Canada’s surprise colossal 100 basis-point rate hike signalled that inflation has become entrenched and that policy makers are still behind the curve when it comes to taming runaway prices. However, it appears that the central bank is far from finished when it comes to tightening: according to BMO, the overnight rate could hit as high as 6% by next year in order to surpass inflation.

“The cure for inflation is a recession,” said BMO Global Asset Management head of fixed income Earl Davis to Bloomberg. According to him, the bank’s one percentage point increase signalled that policy makers are taking a path towards accelerating the timeline towards terminal rates, which could go from the current 2.5% to 4% by the end of the year over the span of the remaining three meetings.

Going forward, Davis said that markets are not accounting for the fact that central bank’s monetary policies typically have to exceed the inflation rate, meaning that borrowing costs will likely go up another 2 percentage points come 2023 assuming that the current inflation rate drops to around 5%.

Davis cited inflation rates being witnessed south of Canada’s border, which hit a staggering 9.1% in June, surprising markets and policy makers alike. America’s higher-than-expected consumer prices are like a “canary in the coal mine for Canada,” because Canada is even more susceptible to higher inflation given a weaker dollar relative to its US counterpart.

But, as Davis points out, with the Bank of Canada dropping the word ‘forcefully” from its statement, the peak of colossal rate hikes has likely surpassed. “By removing ‘forcefully’, it means this is as forceful as they get for independent rate hikes.” Thus, the ensuing increases to borrowing costs will most likely remain below 100 basis points during the remaining policy meetings.

Information for this briefing was found via Bloomberg. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.