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VIEW: Goldman Sachs: Forecasting Two 75bp Hikes And A 4.25% Terminal Rate

BOC

Goldman Sachs note that “today’s inflation report showed further broad-based strength, and a jump in the average of the three measures of core inflation preferred by the BoC to 4.7% Y/Y. On the other hand, house prices have started to decline. We expect a roughly 10% correction because of low affordability from high prices and rising mortgage rates. As a result, we expect the homeowners’ replacement cost contribution to headline year-over-year inflation to fall from +70bp now to -20bp by mid-23. Put together with the firmer near-term data, we now expect headline inflation to peak at 8.0% in August (vs. 7.1% in August) but to fall slightly more quickly to 3% in mid-23. Following the BoC’s preparedness “to act more forcefully”, its view that the housing market moderation is healthy, and the recent uptick in wage growth, we forecasted a 75bp hike in July. We now expect an additional 75bp hike in September because we forecast 8.0% yoy for the July headline inflation print (latest available at time of meeting) versus roughly 5.5% in the April MPR. We also look for 50bp hikes in October and December, and a 4.25% terminal rate reached in January 2023 (vs. 3.5% previously). We expect growth to remain resilient this year at +3.2% Q4/Q4 before slowing to +1.9% Q4/Q4 next year. This is because the boost from rising oil prices and reopening should diminish at the same time as tighter financial conditions weigh on growth.”

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Goldman Sachs note that “today’s inflation report showed further broad-based strength, and a jump in the average of the three measures of core inflation preferred by the BoC to 4.7% Y/Y. On the other hand, house prices have started to decline. We expect a roughly 10% correction because of low affordability from high prices and rising mortgage rates. As a result, we expect the homeowners’ replacement cost contribution to headline year-over-year inflation to fall from +70bp now to -20bp by mid-23. Put together with the firmer near-term data, we now expect headline inflation to peak at 8.0% in August (vs. 7.1% in August) but to fall slightly more quickly to 3% in mid-23. Following the BoC’s preparedness “to act more forcefully”, its view that the housing market moderation is healthy, and the recent uptick in wage growth, we forecasted a 75bp hike in July. We now expect an additional 75bp hike in September because we forecast 8.0% yoy for the July headline inflation print (latest available at time of meeting) versus roughly 5.5% in the April MPR. We also look for 50bp hikes in October and December, and a 4.25% terminal rate reached in January 2023 (vs. 3.5% previously). We expect growth to remain resilient this year at +3.2% Q4/Q4 before slowing to +1.9% Q4/Q4 next year. This is because the boost from rising oil prices and reopening should diminish at the same time as tighter financial conditions weigh on growth.”