Canadian Investors Expect the Bank of Canada to Raise Interest Rate in Half-Percentage-Point Increments

As the outlook for Canada’s inflation rate continues to worsen, Canadian investors are betting that the Bank of Canada (BoC) will begin hiking its key interest rate in half-percentage-point increments, with the first of rarely used upsize moves possibly coming as soon as this month.

The rush to price in more aggressive tightening comes as a commodities rally sparked by Russia’s invasion of Ukraine threatens to push Canadian inflation higher for longer. It touched a 30-year high of 5.7% in February.

Money market experts expect the BoC to raise interest rates between 200 and 225 base points in the six remaining interest rate announcements in 2022, an increase from 140 basis points before a blockbuster employment report in March.

The bet implies that up to three of those meetings could result in hikes greater than the quarter-percentage-point increments usually favored by the central bank. The last time it pushed through a half-percentage-point hike was in May 2000.

Canada’s economy could be particularly sensitive to a faster pace of interest rate hikes after households ramped up borrowing to record levels during the pandemic to participate in a red-hot housing market.

Simon Harvey, head of FX analysis for Monex Europe and Monex Canada said, “The Bank of Canada needs to aggressively tighten policy to keep inflation expectations for the consumer and also for businesses well anchored.” Harvey added, “It’s a case of do it now because later it will come at a greater cost to economic growth.”

The central bank hiked borrowing costs in March, for the first time since October 2018, lifting its policy rate to 0.50%.