Traders put 80% odds on three-quarter-point rate hike in Canada
Bets are mounting quickly for a super-sized interest rate hike from the Bank of Canada next month, on the heels of expectations for a 75-basis-point move from the Federal Reserve this week.
Trading in overnight swaps now suggest there’s an 80 per cent chance of a three-quarter-point hike at the Canadian central bank’s July 13 decision, which would bring the country’s policy interest rate to 2.25 per cent. Last week, traders put the probability of a move of that magnitude at about a half.
The rapid change in expectations comes as investors weigh the consequences of stickier inflation taking hold in North America and the prospect of more aggressive moves by policy makers to wrestle price pressures down.
Short-term bonds have fallen sharply in response to the worsening inflation picture. The yield on benchmark Canada two-year debt is up about 78 basis points this month to 3.437 per cent as of late Tuesday morning, the highest since January 2008.
Bank of Canada Governor Tiff Macklem passed on an opportunity last week to walk back market expectations for more aggressive action. Asked whether households can handle an increase in borrowing costs bigger than 50 basis points, Macklem didn’t push back.
Details of Canada’s next inflation report, due June 22, will be a key consideration. Most economists expect consumer price pressures will continue to rise from the yearly pace of 6.8 per cent set in April -- the highest since the start of 1991.
“If the market is fully priced and inflation surges like we saw in the US, it will be hard for the Bank of Canada to pass up the opportunity to more forcefully hike rates,” Benjamin Reitzes, rates strategist with Bank of Montreal, said by email.
Macklem and his officials have already launched into one of the most aggressive tightening cycles in Bank of Canada history, raising the overnight rate from an emergency low of 0.25 per cent in March to 1.5 per cent currently. Markets expect rates will rise to at least 3.5 per cent by the end of this year.
Policy makers were slow to start normalizing monetary policy in Canada but accelerated both the pace and magnitude of hiking, delivering back-to-back half-point interest rate increases in April and June to slow the build-up of inflationary pressure.