The Bank of Canada is expected to bolster its defence against inflation. BMO Capital Markets' latest forecast shows aggressive interest rate increases. They now predict that the Bank of Canada's hikes will double the previous forecast. The accelerated increases play a big role in the central bank's ever-changing dual with inflation.
BMO changed its interest rate forecast after evolving market expectations and BoC terminology. Tiff Macklem, BoC deputy governor, recently said they would monitor the "pace and magnitude" of rate increases. Which indicates they could alter their outlook towards market expectations.
The BMO forecast sees two 50 basis hikes by June 1st's scheduled meeting. They then expect a 25 basis point hike in the month of July - which would push the BoC key interest rate to pre-pandemic levels within a very short period of time.
The Bank of Canada predicts that 1.75% will be the low range of the neutral policy rate - where monetary policy holds no influence. Anything below the neutral indicates stimulus for economic expansion - above the neutral rate is where monetary policy curtails growth. The BoC expects the neutral range to fall between 1.75% and 2.75%, as forecasts from the Big Six Banks predict the higher end of the two will be required.
“We then expect a more tepid pace of tightening with 25 bp rate hikes at each of the next three MPR meetings, leaving policy rates at 2.5%, toward the higher end of the BoC’s neutral range, consistent with still-stubborn, if easing, inflation pressures,” explained Michael Gregory, BMO’s Deputy Chief Economist. If this were to happen, the central bank's rate will reach 2.5% in Q1 2023. The rate would be at its highest in fifteen years, a level many thought they'd never see again.