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VIEW: Barclays See BoC 50bp Hike In Tight Call

CANADA
  • Barclays expect a 50bp hike as there is still excess demand in the economy and core inflation has yet to peak, but they acknowledge a tight call with 25bp.
  • The 50bp would allow for front load with the Bank signalling clearly that it is close to the end of the cycle. The statement should remove “further rate increases will be needed” to “may be necessary” conditional on data outcomes, leaving the door open for a residual 25bp hike in January to a terminal 4.5% when the next MPR update is expected.
  • For a few months, the data trend had been deteriorating, prompting the bank to turn dovish and weigh the risks of over- and under-tightening as more balanced. However, since then, the data has been more mixed.
  • Further, Canada is seen as more resilient from a financial stability perspective than its Antipodean and Scandinavian peers, whilst the next meeting coming at the end of January could further incentivise front loading in an effort to curtail high inflation.
  • The market is only pricing close to 30bp but that won't deter the BoC given recent surprises, and a 50bp hike should see CAD appreciate against USD but sustained gains will depend on the risk backdrop given the relatively outsized contribution of risk sentiment relative to other drivers for USDCAD.
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