More economists are piling into the belief that the Bank of Canada will hike its rate next Wednesday after data showed that inflation is at a 30 year high.
Bank of America's global research team moved its call up to Jan. 26 from April after CPI came in above 4% for the fifth month in a row.
According to BOC's forward guidance, the economy has no slack left which meets the necessary condition for a hike. BofA economist Carlos Capistran said that pressures on core inflation seal the deal for a hike in January.
Scotiabank says Canada is at a critical fork in the road and that the Bank will hike 25 basis points next week, but also that it will follow a 25 point hike in March, 50 points in April and three more hikes to get to 2% by the end of the year. This would be followed by two more increases in early 2023 to bring the rate to 2.5% in two years.
Its outlook is even more aggressive than the market s, which is pricing in as many as six increases this year and two more in 2023 to bring the rate to 2.25 in two years, and makes it the most hawkish among Canada's big banks, reports Bloomberg.
Before Wednesday's data release, Scotiabank had been forecasting that the rate would rise to 1.25% by the end of the year.
While Omicron is a concern, a bigger one is Canada's explosive combination of high inflation and soaring house prices, wrote Derek Holt, Scotiabank economist.
Holt believes that Canada's inflation reading is lowballed because it doesn't capture used vehicle prices, which are some of the hottest price pressures, unlike the U.S. and U.K. CPI. He said if headline inflation were included, it would be closer to 6% a year.
The cruellest thing a Canadian can do to Canadians dealing with Omicron is to be indifferent to the fact that their cost of living is soaring across virtually everything they consume, which adds insult to injury, he wrote.
Bringing forward rate hikes is the best medicine to make a soft landing. Hard landing risks would increase if the BoC continues to look the other way while maintaining overly accommodative policy. The market is now pricing in a 75% chance of a hike Wednesday, and the ranks are swelling. Some people are not convinced.
Capital Economics thinks that the Bank will use this meeting to set up a rate increase in March, though it doesn't rule out an earlier hike.
Capital argues that the Omicron outbreak is more disruptive than the previous waves, with both the Ivey PMI and CFIB Business Barometer, which measures small business confidence sinking to their lowest levels since the pandemic began.
The Bank will be more hawkish next week, but we suspect it would still prefer to avoid the negative optics that surround a rate hike in a month, as much of the country is subject to Omicron restrictions, wrote economist Stephen Brown in a note Wednesday.
The Bank, according to the economists at Oxford Economics, is cautioned with even more caution. The forecast issued on Monday predicted the first hike to come in July and another in October. It expects inflation to peak at 5% year over year in April, and then fall to the mid- 2% range by the end of the year.
In a note, Tony Stillo said that faster rate hikes were possible if the Omicron impact is less severe than anticipated, because our below-consensus rate forecast reflects our view that the Bank of Canada will be cautious when raising interest rates to avoid aggravating Canada's underlying vulnerabilities related to elevated household debt and overvalued house prices.