Market News

BY  Erik Hertzberg

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The Bank of Canada is expected to accelerate the start of its interest-rate tightening to as early as next week, amid growing evidence the economy is hitting limits and inflation pressures are mounting.

Economists at TD Securities Inc. and Laurentian Bank said Monday policy makers led by Governor Tiff Macklem will start to increase borrowing costs at their Jan. 26 policy decision. Bank of Montreal brought forward its call to March from April, while Bank of Nova Scotia said the central bank “cannot afford” to wait any longer.

Markets, meanwhile, are pricing in a 75% chance Macklem will move next week; traders are betting on as many as six rate hikes over the next year.

The hawkish calls come on the heels of the Bank of Canada’s fourth-quarter survey of business executives, which described an economy running increasingly hot, with widespread labor shortages, record inflation expectations, and strong demand.

“The context is appropriate for a liftoff next week,” Dominique Lapointe, an economist at Laurentian in Montreal, said by email.

The Bank of Canada has kept its overnight rate at the emergency level of 0.25% since March 2020, after the Covid-19 pandemic hit North America.

Two-year Canada bonds were trading at a yield of 1.233% as of 7:50 a.m Toronto time on Tuesday morning, near the highest level since the start of the pandemic.

For some analysts, Monday’s survey data confirmed that risks require the central bank to move sooner than later.

“The Bank of Canada cannot afford to wait any longer to tighten monetary policy,” Derek Holt, an economist with Scotiabank, wrote in a report to investors.

In a Bloomberg News survey of economists earlier this month, only four of 20 analysts predicted a rate increase before April.

(Updates with chart of market pricing, pricing on Canada two-year bond)