Bank of Canada could hike rates this year

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Bank of Canada could hike rates this year

The Bank of Canada could hike interest rates aggressively over the coming year, but gains could be capped by the economy's dependence on the housing market, according to a Reuters poll.

The Canadian dollar is expected to move 0.4% higher in three months, to 1.25 per U.S. dollar, or 80 U.S. cents, the same as last month's forecast. It was expected to climb to 1.23 in a year's time.

If Russia-Ukraine tensions ease over the next few months, there will be a reason for risk-on trade, which would be beneficial for the Canadian dollar, but also a help from the Bank of Canada, in so far as it front-loads rate hikes, said Royce Mendes, director of macro strategy at Desjardins.

The central bank of Canada is expected to raise its overnight interest rate by half point at its next policy meeting on April 13 according to a majority of economists who have raised their inflation expectations for this year, which is why it is expected to raise its overnight interest rate by half a percentage point. Since May 2000, the BoC has not raised rates by that magnitude. The central bank hiked for the first time since October 2018 as it moved by the quarter-percentage-point increment it usually favors last month.

Stephen Brown, a senior Canada economist at Capital Economics, said there was still scope for a boost as investors digest the positive impact that higher commodity prices are having on the Canadian economy.

Canada is a major producer of energy products, helping to drive exports to a record high in February. The housing market, the key part of the economy, has started to lose some momentum.

That could be an early indication that there are limitations on how high the Bank of Canada will be prepared to lift rates in the current tightening cycle, at least compared to the Federal Reserve.

The recovery in Canada has been more dependent on residential investment and house prices than the United States, and they are more sensitive to interest rate hikes, Brown said.