Economists say the Federal Reserve raising its key interest rate by three-quarters of a point — its largest hike since 1994 — increases the odds of the Bank of Canada (BoC) following suit next month.
The U.S. bank authority says the move will shift the country’s benchmark rate to a range between 1.5 per cent and 1.75 per cent as it tries to tame soaring inflation.
While the Bank of Canada recently upped its interest rate by a half point two times in recent months, governor Tiff Macklem has hinted he is prepared to act “more forcefully.”
Josh Nye of RBC Economics says previously the top argument against the Bank of Canada raising the interest rate by more than a half point was that its U.S. counterpart was unlikely to be that aggressive.
“One of the top arguments against the bank acting more aggressively was just that the Fed wasn’t expected to be that aggressive because before this week the Fed had taken those larger hikes off the table,” he said.
“If that was generally seen as reducing the odds that the Bank of Canada would do a larger hike, with the Fed now moving more aggressively with 75 basis points today, I think that really increases the odds that the Bank of Canada does the same.”
As soon as people began to predict the Fed would take a larger hike last week, Nye said he saw pricing for the next two Bank of Canada meetings moving up too and bond yields increasing.
CIBC economists Avery Shenfeld and Andrew Grantham feel similar and say in a note to investors that they see the Bank of Canada getting to 2.75 per cent this year, before a deceleration in growth and inflation, convince the bank to lay off hikes.
“With the Fed having normalized a 75bp move, we see the BoC also hiking by that amount in July,” they wrote.
Nye has also predicted the rate getting up to 2.75 per cent this year, but if inflation is not slowing, could see it even hitting three per cent.
— with files from Global News
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