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BANK OF CANADA MAY BE FORCED INTO EARLY RATE HIKE

Posted in Finance, Industry Trends, Newsworthy

BANK OF CANADA MAY BE FORCED INTO EARLY RATE HIKE
The Bank of Canada will have to start raising interest rates in the first half of 2022 because supply constraints and hotter-than-normal inflation aren’t going away, Fidelity Investments portfolio manager David Wolf said.

Wolf, a former adviser to the central bank, said its models overestimate the amount of slack in the economy. The COVID-19 pandemic has led to a “rearranging of the economy” and shortages of workers and products will persist, he said.

“The bank thinks that there’s a lot of capacity which I don’t think there really is, and the facts on the ground of rising prices show that,” Wolf said Wednesday at the Bloomberg Canadian Fixed Income Conference. That’s why investor expectations that the bank will begin lifting its benchmark interest rate from 0.25 per cent in the second half of next year are off base, he said.

“It’s going to come a lot sooner than that,” Wolf said. “The consequences, I think, are pretty straightforward from a market point of view. The short end backs off, curve flattens, Canadian dollar goes up — and certain businesses in Canada may have a harder time because of the effects of the tightening.”

The yield on benchmark five-year Canadian debt rose more than 3 basis points to 1.128 per cent as of 3 p.m. in Toronto, the highest level since February.

The consumer price index rose 4.1 per cent in August from a year earlier, the fastest pace since 2003, marking the fifth consecutive month of inflation readings above the Bank of Canada’s 3 per cent cap.

 

Story by: Financial Post

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