‘Whistling past the graveyard’: Bank of Canada expected to go big with October rate hike as recession risks loom

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Canada’s top economists are expecting the Bank of Canada to deliver another outsized rate hike on Wednesday in its continued fight against decades-high inflation.

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The central bank is expected to raise the policy rate by 50 or 75 basis points as part of the Bank’s strategy of front-loading rate hikes, but comes at a time when recession calls are growing louder. Some economists are expecting the Bank to take its foot off the gas following this rate decision.

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The Bank of Canada has already increased the policy rate by three percentage points over the course of the year, bringing the overnight rate to 3.25 per cent. The team at Desjardins expects Bank of Canada governor Tiff Macklem’s tough talk on inflation would push him to hike rates by another 75 basis points, bringing it to four per cent.

“Governor Macklem knows he can’t continue like this forever,” wrote Royce Mendes, managing director and head of macro strategy at Desjardins, and associate Tiago Figueiredo in an Oct. 21 note, adding that a hike this size is consistent with the Bank’s front-loading rate hike strategy.

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“But we expect the accompanying statement or press conference to at least implicitly concede that future adjustments won’t be as large,” they added. “They might even spell out that the central bank will be moving in December to the more finely balanced, decision-by-decision approach which Macklem alluded to recently.”

If the Bank does decide to shift gears and cool the pace of tightening, it would be guided by the crucial details expected in the monetary policy report accompanying the rate decision. Only once these new economic forecasts are made clearer could the Bank begin to make major shifts in policy and communications, according to Desjardins.

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As central banks around the world undertake in the same rate-hiking mission, the drumbeat of global recession risks grows stronger. It’s a mounting risk central bankers can no longer afford to ignore, said the Desjardins team.

“Overall, central bankers are in uncharted territory and there are many unknowns,” wrote Mendes and Figueiredo. “But we expect them to acknowledge both the likelihood of recession and the probability that future rate hikes will be smaller. At this point, their whistling past the graveyard simply isn’t fooling anyone.”

The Big Six banks are raising red flags as well, as the Royal Bank of Canada maintained its expectation of a moderate recession in the first half of next year. RBC isn’t alone; the Bank of Nova Scotia echoed this sentiment with chief economist Jean-François Perrault predicting a technical recession in 2023 and for the terminal rate, or the likely rate the Bank will max out at before cutting, at 4.25 per cent.

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The RBC Economics team, which is also expecting the central bank to go big with its rate decision on Wednesday with a 50-basis point hike, also highlighted slowing economic growth. Nathan Janzen, assistant chief economist at RBC Economics, pointed to a 0.6 per cent drop in hours worked in September and flagged softening sentiment in the Bank of Canada’s third quarter business outlook survey released Oct. 17. This most recent survey revealed the most severe drop in business sentiment since the beginning of the pandemic in Canada.

Rising rates have been working their way through the economy, weighing on demand and growth. Despite the drive to bring demand back in balance with strained supply, the latest inflation reading in September came in hotter than expected at 6.9 per cent year-over-year. Excluding food and energy, inflation rose at an annualized pace of 5.4 per cent compared to the 5.3 per cent recorded a month earlier.

This latest data point increased the odds of another supersized 75 basis point hike for some economists. To put a lid on this pace of inflation, Canada may have to contend with more quarters of slowing growth.

“But inflation isn’t likely to return fully and sustainably to the central bank’s target range of two-to-three per cent until the economy slows further,” Janzen said in an Oct. 21 note. “That’s keeping monetary policymakers firmly focused on rate hikes, even as the growth outlook softens.”