BoC: Markets pricing in a rate hike in the second half of 2022 – RBC CM

The Bank of Canada (BoC) left interest rate unchanged on Wednesday as expected. Josh Nye, Senior Economist at RBC Economics Analysts affirms they see the Canadian economy returning to full capacity in 2022, sooner than the central bank has assumed. They expect a rate hike in the second half of 2022 “which markets are currently pricing in.”

Key Quotes: 

“As expected, the Bank of Canada left its key policies unchanged today, holding the overnight rate steady at 0.25% and government bond purchases at $4 billion per week. It also reiterated its forward guidance to keep the overnight rate at its current level until the economy returns to full capacity, which in its January forecast wasn’t until 2023.”

“We see the Canadian economy returning to full capacity in 2022, sooner than the central bank has assumed. That leaves us expecting a rate hike in the second half of 2022 which markets are currently pricing in.”

“Well before that first rate hike, we think the BoC will taper its QE program in April.”

“The impact of that announcement on financial conditions should be modest given the BoC’s guidance on tapering and the fact that reduced purchases will also coincide with reduced new issuance by the government in the upcoming fiscal year.”

“Amid improving growth prospects and rising inflation expectations, government bond yields have jumped higher this year from historically low levels. While the BoC hasn’t expressed discomfort with that increase (which still leaves financial conditions highly accommodative) it was clear in today’s statement that the central bank doesn’t want to add to selling pressure.”