November 30, 2023

Bank of Canada will hike this month – JP Morgan

boc macklem

Canada is locked down in the omicron wave but JP Morgan economists say it doesn’t matter. They’re now forecasting the Bank of Canada will hike interest rates on January 26.

“Based on rhetoric from the Bank of Canada in December, it was clear that labour market dynamics and outperforming economic data had created heightened concerns at the Bank that the output gap was closing more rapidly than expected,” they wrote in a note to clients.

They had previously called for an April hike.

That would be the first hike of the cycle for the BOC, which halted its bond purchases late last year in a somewhat surprisingly hawkish move.

The market is pricing in a roughly 50% chance of a hike in January so it wouldn’t be a shock but the vast majority of economists suspect they’ll wait until the March 2 meeting.

“We expect virus-related disruptions and any hit to confidence to be short-lived; the increase in cases already looks to be slowing. While the Bank has cautiously acknowledged the uncertainty around past waves, the playbook has generally been to look through the temporary nature of any hit to activity,” JPM wrote.

The rise in WTI crude to $82 today certainly helps the case.

If the Bank of Canada did hike rates it would be a tailwind for the loonie but perhaps not as much as some hope. An earlier hike could spark worries about Canada’s over-valued housing market or lead people to price in a lower terminal rate.

In the shorter-term, USD/CAD continues to break down from a head-and-shoulders top that I’ve been highlighting:

USD/CAD daily

USD/CAD daily with head and shoulders top

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