How banks differ on future BoC rate hikes

Following 3% GDP growth in 2017, Canada’s economy is expected to moderate going forward.

In a long-term forecast report, TD Bank forecasts Canadian GDP to settle at a more sustainable 2% rate over the next two years. From 2020-2022, growth is expected to average 1.7%.

“Population aging and modest productivity growth equate to a slower pace relative to history,” says TD.

The bank says Canada’s economic capacity has largely been absorbed, which should “keep the Bank of Canada biased toward further rate hikes.” The bank expects one more rate increase in 2018 and two in 2019 (see its table of forecasted interest rate hikes).

“The policy interest rate is anticipated to reach 2.50% by 2022, which remains modest within a historical context,” says TD.

In a report on central banks, RBC economist Josh Nye says Canada’s economic backdrop makes the case for gradual tightening, “but developments on the trade front will be equally important in the Bank of Canada’s near-term decisions. That point was certainly emphasized in their March policy statement that left rates unchanged.”

Still, RBC’s rate forecasts have the overnight rate reaching 2.0% in Q4, requiring three more hikes this year.

In a monetary policy report released earlier this month, National Bank economists say they expect two rate hikes this year.

“We expect the Bank of Canada to remain on the sidelines for another couple of months, by which time there may be more clarity on trade, something that may allow the central bank to raise interest rates two more times later in the year,” says the report.

Also in a forecast report released earlier this month, Scotiabank chief economist Jean-François Perrault says he expects the Bank of Canada will raise rates by another 50 basis points this year “based on domestic fundamentals,” including above-potential growth and price pressures.

Perrault expects the next hike will come in May, “though the odds of that are decreasing given mounting trade-related uncertainties.” He plans to re-evaluate his outlook when trade announcements are made.

BMO also forecasts two rate hikes, in Q3 and Q4.

Read: Why news of NAFTA progress underwhelms

U.S. outlook

U.S. fiscal stimulus should see growth of 2.7% in 2018, and 2.9% in 2019, says TD.

Indeed, today the Fed upped its 2018 GDP projection by two ticks to the 2.7% consensus, and increased its 2019 call to 2.4%, as it raised its key interest rate by a quarter point to a range of 1.5% to 1.75%.

“As the temporary lift from tax cuts and spending fade, growth is expected to moderate to 1.8% by the end of 2020,” it says.

TD expects an accelerating path for inflation and monetary tightening as the U.S. economy is already at or near full employment.

The tight labour market and wage pressures should result in a pass-through to consumer inflation. “As a result, we anticipate a very modest overshoot of the Federal Reserve’s 2.0% target over the next few years,” says TD.

In a prescient preview report of today’s stateside rate announcement, Michael Gregory, BMO deputy chief economist, says real GDP growth rates, lower unemployment rates and faster inflation rates should serve as the backdrop for an upward revision in Fed rate hikes.

“We look for the median projection for the Fed funds rate to show four rate hikes this year (instead of three before), with a 2018-end range of 2.25%-to-2.50%. […] Beginning with a higher starting point, for 2019, at least two rate hikes should remain, with a year-end range of 2.75%-to-3.00%,” possibly higher, he says.

Nye had also forecasted four rate hikes from the Fed this year, starting with today’s announcement.

“With the economy running at full capacity and getting a fiscal boost this year, the Fed is increasingly confident that inflation will hit 2% on a sustained basis,” he says. “That should keep them hiking through 2019.”

Today, the Fed added a hike to its dot plot forecast for 2019.

Read the full reports from TD, RBC, National Bank, Scotiabank and BMO’s Gregory.

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