BMO Revises Bank of Canada Rate Forecast Higher, Expect 2008-Levels By Next Week

Canadians are about to see interest rates they didn’t think were possible in just a few days. BMO made revisions to its overnight rate forecasts this week. At next Wednesday’s meeting, they’re calling the largest rate hike in two decades. That will bring interest rates (and your borrowing costs) to the highest level since 2008. 

Bank of Canada Expected To Hike Rates To Levels Last Seen In 2008

BMO sees the Bank of Canada (BoC) making a huge hike to interest rates next week. At the July 13th meeting, they’re calling an increase of 75 basis points (bps) to the overnight rate. It would be the largest hike since 1998, and push the overnight rate to 2.25% — the highest level since 2008.

BMO also made an upward revision to peak rates during this cycle. By year end, they see the overnight rate hitting 3.25%, about 25 bps above the neutral policy rate. The neutral rate is the level where the overnight rate no longer provides inflation (below) or it’s not a drag on the economy (above). 

Basically BMO expects the central bank to try and cause friction to reduce inflation. They have pretty good reason to believe that can happen — the BoC said it would. Returning inflation back to the target range is the goal, as they’re hoping to reduce the risk of stagflation. 

Canadian Interest Rates Will Remain At Higher Levels Even With A Weak Economy

Canada’s economy, complete with over bloated government and household debt, isn’t expected to handle higher rates well. BMO is only forecasting higher rates will last until 2024, at which point they see rate cuts. Even with cuts, they don’t expect interest rates to fall to the level 2020 started with. 

Understandably a 40-year high for inflation is going to require a little firepower to cool things down. It’ll slow the economy and force the central bank to cut rates at some point, and ease pressure on the economy. It might be years before that happens though, and the cuts aren’t expected to bring rates to levels experienced in the past decade. We’re officially set to enter a new era of more efficient capital and higher rates. 

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