Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.
Bank of Canada Governor Tiff Macklem is expected to raise the overnight lending rate another 75 basis points Wednesday to the highest since 2008 and signal more is coming to tackle inflation lingering well above target even as recession warnings mount.
The rate will rise to 4% according to 13 of 21 economists surveyed by MNI and trading in futures markets, taking this year's total to 375bps in the G7's most aggressive tightening campaign. Many investors revised up views from a half-point hike just last week as inflation slowed less than expected to 6.9% from 7% and the Bank's quarterly surveys showed record consumer and business price expectations.
Macklem even took to a Twitter video in recent weeks to tell the public strong medicine is needed before inflation returns to 2% and to warn big price gains could become entrenched. That stern message comes as the IMF, major commercial banks and former Governor Mark Carney say Canada is likely heading to recession.
Besides the hike a key focus is whether the Bank softens the view, expressed in September even as it scaled back to 75bps from July's 100bp increase, that it is too soon to talk about a more balanced policy approach. Macklem, like Fed officials, has declined to offer guidance on a pivot and another aggressive hike Wednesday will make it difficult to provide a dovish message.
Some economists say a nod to slower hikes remains possible and that Canada's terminal rate is around 4.5%.
WEAKER DOLLAR
While the Bank's economic outlook will be marked down alongside the rate decision, Macklem has said a narrow path to a soft landing remains in part because unemployment remains near record lows. Investors will also watch for whether inflation forecasts are revised up and for any shift in the forecast that the CPI will return to 2% around the end of 2024.
The Bank in July raised inflation forecasts to 4.6% from 2.8% next year and to 2.3% from 2.1% in 2024. The latest CPI report showed core inflation around 5%, which economists say the Bank will see as another sign more tightening is needed.
"That trust that we are going to return inflation to target must be rewarded," Macklem told reporters Oct. 14.
Canada's dollar has also wilted 11% against the U.S. dollar during the past year. Macklem has been blunt, saying the resulting higher prices for Canada's imports means he may hike even more.
Investors have under-priced Macklem's resolve on inflation, a one-time aide to former Fed chief Paul Volcker has told MNI. (See: MNI INTERVIEW: BOC Is Sounding Like Volcker- Ex-Volcker Aide) The inflation surge has "seriously tested" the Bank's credibility under targets introduced in 1991 and a clear message about bringing CPI back to target is needed to anchor expectations, Deputy Governor Paul Beaudry said in a Sept. 20 speech.
Source: Bank of Canada
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.