EconoFACTS

March 28, 2022 | 14:38

BoC and Fed Interest Rate Forecast Update: Faster and Higher

Economist

Deputy Chief Economist, Head of U.S. Economics and Managing Director
Economics

Michael is part of the team responsible for forecasting and analyzing the North American economy and financial m... (Read more)

Benjamin Reitzes

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

Michael Gregory , CFA

Deputy Chief Economist, Head of U.S. Economics and Managing Director
Economics

Michael is part of the team responsible for forecasting and analyzing the North American economy and financial m... (Read more)

Benjamin Reitzes

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

Central Banks Become More Aggressive

At long last, central banks are finding their inflation-targeting religion as the world deals with prices rising at the fastest pace in decades. The past two weeks has seen a sharply hawkish turn in rhetoric from the Bank of Canada and the Federal Reserve. Accordingly, we're making some changes to our outlook for policy rates.

With inflation accelerating well above the Bank of Canada’s 2% target, and surging core measures signaling a broadening of price pressures, policymakers have flagged a more hawkish path for interest rates. On Friday, March 24, BoC Deputy Governor Kozicki stressed that inflation is far higher than policymakers are comfortable with and that the Bank is “prepared to act forcefully”. She expects the “pace and magnitude of interest rate increases and the start of QT to be active parts of our [the BoC’s] deliberations at our next decision in April”. The words “forcefully” and “magnitude”, along with the broader change in tone, are the reasons we are changing our Bank of Canada rate call. We are now forecasting a 50 bp rate hike at each of the next two policy announcements (April 13 and June 1), followed by a 25 bp move in July. That would put rates at 1.75%, the lower end of the BoC’s 1.75%-to-2.75% neutral range and the peak of the last cycle. In addition, quantitative tightening (QT) looks to start at the April meeting. We then expect a more tepid pace of tightening with 25 bp rate hikes at each of the next three MPR meetings (October, January and April), leaving policy rates at 2.5%, toward the higher end of the BoC’s neutral range, consistent with still-stubborn, if easing, inflation pressures.

At the Federal Reserve, Chair Powell’s surprisingly candid policy signalling in his recent speech has led us to lift our call for policy rate hikes. Powell said, “there is an obvious need to move expeditiously to return the stance of monetary policy to a more neutral level; if we conclude that it is appropriate to move more aggressively… by more than 25 basis points at a meeting or meetings, we will do so; if we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well”. We now expect the FOMC to hike by 50 bps at the next two meetings before shifting back to a 25-bps-per meeting cadence for the reminder of the year, with the target midpoint hitting 2.375% by December (50 bps above our previous call, with the net risk it could occur sooner). Given this is the FOMC’s median longer-run neutral level and the slightly onerous peak of policy rates last cycle, we suspect the Fed will move more cautiously (every second meeting) in 2023. We see the target range terminus at 2.75%-to-3.00% by mid-next year.