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‘Whistling beyond the graveyard’: Bank of Canada expected to make big October rate hike as recession risks loom

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The central bank is expected to raise the policy rate by 50 or 75 basis points as part of the Bank’s strategy of early rate hikes.

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Canada’s top economists expect the Bank of Canada to make another outsized rate hike on Wednesday in its continued fight against decades-high inflation.

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The central bank is expected to raise the policy rate by 50 or 75 basis points as part of the bank’s strategy of early rate hikes, but it comes at a time when recession calls are growing louder. Some economists expect the Bank to take its foot off the gas after this rate decision.

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The Bank of Canada has already raised the policy rate by three percentage points over the course of the year, raising the overnight rate to 3.25 percent. Desjardins’s team hopes Bank of Canada Governor Tiff Macklem’s tough talk on inflation will push him to raise rates by another 75 basis points, taking them to 4 percent.

“Governor Macklem knows he cannot continue this way forever,” Royce Mendes, Desjardins managing director and head of macro strategy, and associate Tiago Figueiredo wrote in an Oct. 21 note, adding that an increase of this size is consistent. with the Bank strategy of raising rates of advance charge.

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“But we hope that the accompanying statement or press conference at least implicitly acknowledges that future adjustments will not be as large,” they added. “They could even explain that the central bank will move in December to the more balanced decision-by-decision approach that Macklem alluded to recently.”

If the Bank decides to change gears and moderate the pace of tightening, it will be guided by the crucial details expected in the monetary policy report accompanying the rate decision. According to Desjardins, only once these new economic forecasts become clearer could the Bank begin to make major policy and communications changes.

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As central banks around the world engage in the same mission of raising rates, the drumbeat of global recession risks grows louder. It’s a growing risk that central bankers can no longer afford to ignore, Desjardins’ team said.

“Overall, central bankers are in uncharted territory and there are many unknowns,” Mendes and Figueiredo wrote. “But we expect them to recognize both the likelihood of a recession and the likelihood that future rate hikes will be smaller. At this point, his whistle as he passes through the graveyard just isn’t fooling anyone.”

The Big Six banks are also raising red flags, as the Royal Bank of Canada maintained its expectation of a moderate recession in the first half of next year. RBC is not alone; the Bank of Nova Scotia echoed this sentiment with chief economist Jean-François Perrault predicting a technical recession in 2023 and for the terminal rate, or the likely rate at which the Bank will peak before the cut, at 4, 25 percent.

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The RBC Economics team, which also expects the central bank to make a big deal out of its rate decision on Wednesday with a 50 basis point hike, also highlighted slowing economic growth. Nathan Janzen, assistant chief economist at RBC Economics, noted a 0.6 percent drop in hours worked in September and signaled easing sentiment in the Bank of Canada’s third-quarter business outlook survey released on Oct. 17. This most recent survey revealed the most severe drop. in business sentiment since the start of the pandemic in Canada.

Rising rates have worked their way through the economy, weighing on demand and growth. Despite the push to balance demand with tight supply, the latest inflation reading in September was higher than expected at 6.9 percent year over year. Excluding food and energy, inflation rose at an annualized rate of 5.4 percent compared to 5.3 percent a month earlier.

This latest data point raised the odds of another whopping 75 basis point hike for some economists. To put a cap on this pace of inflation, Canada may have to deal with more quarters of slower growth.

“But inflation is not likely to return fully and sustainably to the central bank’s target range of two to three percent until the economy slows further,” Janzen said in an Oct. 21 note. “That keeps policymakers firmly focused on rate hikes, even as growth prospects soften.”

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