The Bank of Canada will hike its key interest rate by a modest quarter point to 4.50 per cent 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 per cent in December, is still more than three times the bank’s 2 per cent target and is expected to remain above it at least through Q3 2024, despite a median 65 per cent chance of recession within a year, up from 51 per cent 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 per cent of economists, 26 of 29, expected a quarter-point rise on Jan. 25 to 4.50 per cent, 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 per cent for the remainder of the year, poll medians showed. There were just two forecasts for the terminal rate to reach 4.75 per cent 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 per cent, 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 per cent from 5.1 per cent. It was forecast to rise to 6.2 per cent in the third quarter and average 6.1 per cent next year, according to medians from the poll.