VIDEO Investors have increased their bets the Bank of Canada will hike interest rates in December and beyond, with rates peaking at three per cent, after the central bank on Wednesday announced a seventh consecutive hold at 2.25 per cent.
Bets for a December hike of 25 basis points rose to nearly 90 per cent on Wednesday via the overnight swaps market — used by investors and financial institutions to manage short-term interest rate risks — up from about 60 per cent the day before the rate announcement.
Bets for hikes in 2027 increased, too, with investors going all in on one 25-basis-point hike in January and some betting on as many as three hikes by mid-year.
“That seems excessive to me,” Royce Mendes, managing director and head of macro strategy at Desjardins Group , said. “There is a necessary amount of tightening that will eventually be justified by the data, but I would say the level implied by market pricing seems excessive.”
But he said swap investors don’t have it completely wrong.
Mendes is calling for 50 basis points of rate hikes in the first half of next year based on Desjardins’ assessment that the Bank of Canada is more worried about i nflation leaking into other parts of the economy after the U.S. war on Iran recently entered its seventh month.
“With regard to the U.S.-Canada trade war, policymakers offered only a lukewarm assessment of the prospects for monetary easing,” he said. “It would likely take severe economic stress for rate cuts to materialize.”
After the U.S. started its war on Iran in late February, swap investors hiked bets for rate increases on the premise that Canada would face another wall of inflation.
Mendes said those calls were premature.
Now, in addition to rising inflation concerns, bets for the U.S. Federal Reserve to hike interest rates have risen to 65 per cent for a 25-basis-point hike at its next meeting on Sept. 16 from about 35 per cent prior to new Fed chair Kevin Warsh speaking at the Jackson Hole central bankers meeting at the end of last week.
Investors are betting 100 per cent on one hike at the December meeting and a 55 per cent chance of a second increase.
“The (Bank of Canada outlook) has a lot to do with what’s happened to pricing for the Fed,” Mendes said.
Economist Derek Holt, vice-president and head of capital markets economics at Bank of Nova Scotia, said he doesn’t think swap markets are off-base either. Indeed, they might even be behind the curve.
A rate hike will be in play at the Bank of Canada’s Oct. 28 meeting, given the central bank’s latest Monetary Policy Report (MPR) will be released at the same time, he said in a note on Wednesday.
Holt said Bank of Canada governor Tiff Macklem suggested during a press conference Wednesday that the next call will be guided by the MPR’s forecasts.
“The (Bank of Canada) statement and presser made clear that their two per cent inflation goal is sacrosanct, that inflation is too high, and that upside risks have increased and that this will be the Bank of Canada’s ‘beacon’ for future policy adjustments,” he said.
Scotiabank expects the Bank of Canada to hike rates to 2.75 per cent by year-end and to three per cent in 2027.
Markets are currently pricing in just over a 40 per cent chance of a rate hike in October.
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The Bank of Canada on Wednesday held its key interest rate at 2.25 per cent for the seventh consecutive time, which was widely expected by economists due to the ongoing uncertainty from rising trade tensions and renewed hostilities in the war on Iran.
“Since our last decision in July, the conflict in the Middle East has persisted without a clear path to resolution. Closer to home, the United States has imposed new tariffs on Canadian exports, and the Canadian government has responded with proportionate counter-tariffs and new supports for hard-hit businesses and workers,” Bank of Canada governor Tiff Macklem said in prepared remarks. — Paula Tran, Financial Post
Plus: ‘Hawkish’ Bank of Canada has some economists pulling forward calls for rate hikes
Today’s Data : Canada quarterly labour productivity, international merchandise trade for July. U.S. trade balance, Challenger job cuts, initial and continuing jobless claims, ISM services indexEarnings: BRP Inc., VersaBank, Lululemon Athletica Inc., Dayforce Inc.
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Today’s Posthaste was written by Gigi Suhanic with additional reporting from Financial Post staff and Bloomberg.
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