BoC to raise rates by 25 bps to peak of 4.50% on Jan. 25: Reuters poll

By Swathi Nair

BENGALURU (Reuters) – The Bank of Canada will hike its key interest rate by a modest quarter point to 4.50% on Jan. 25 and then hit pause on an aggressive tightening campaign, according to a Reuters poll of economists, with risks skewed toward a higher peak.

Inflation, which clocked 6.3% in December, is still more than three times the Bank’s 2% target and is expected to remain above it at least through Q3 2024, despite a median 65% chance of recession within a year, up from 51% in the last poll.

That leaves the BoC in a tight spot, having been inclined to pause its rate-hiking campaign in December but with recent economic data on jobs and inflation suggesting it may not be quite done.

A strong majority of 90% of economists, 26 of 29, expected a quarter-point rise on Jan. 25 to 4.50%, according to a Jan. 17-20 Reuters poll, in line with interest rate futures. The other three expected no change.

The BoC has hiked rates by a cumulative 400 basis points since March 2022. That is slightly less than the U.S. Federal Reserve, which is expected to deliver two more 25 basis hikes this quarter, according to a separate Reuters poll.

“The big risk to our forecast that a 25 bp hike next week will mark the end of the tightening cycle is that the Bank is more concerned than we judge about inflation expectations and the tight labour market, which could prompt it to raise interest rates further,” said Stephen Brown, senior Canada economist at Capital Economics.

“Rather than raise interest rates much further, the bigger risk to our policy rate forecasts is that the Bank will probably keep rates high for longer than we currently assume.”

The BoC is then expected to keep its overnight rate on hold at 4.50% for the remainder of the year, poll medians showed. There were just two forecasts for the terminal rate to reach 4.75% in coming months.

Still, slightly more than two-thirds of respondents, 14 of 20, said the risks to their forecasts were skewed towards a higher terminal rate.

Respondents to an additional question were almost evenly split on whether the BoC was more likely to hold rates for at least the rest of the year than cut them. About 55%, or 16 of 29, expected it to hold, while the remaining 13 saw a cut.

In the meantime, nearly three-quarters of economists in the latest poll had an official forecast that expects a recession to start this quarter and last until the third quarter. That is in line with a recent BoC survey which showed most firms now think a recession is likely.

“We expect a relatively mild recession with an increase in the unemployment rate of slightly less than 2 percentage points, which would be on the lower end of historical recessions,” said Josh Nye, senior economist at RBC.

The Canadian economy generated many more new jobs in December than forecast and the jobless rate unexpectedly declined to 5.0% from 5.1%. It was forecast to rise to 6.2% in the third quarter and average 6.1% next year, according to medians from the poll.

(For other stories from the Reuters global economic poll:)

(Reporting and polling by Swathi Nair in Bengaluru; Editing by Ross Finley and Chizu Nomiyama)