Scotiabank sees aggressive rate hikes by Bank of Canada, Fed this year

Bank of Nova Scotia says central banks in the U.S. and Canada will have to tighten monetary policy quickly to control inflation.

The Toronto-based lender is now projecting the Bank of Canada will hike its overnight policy rate to two per cent by the end of this year, from the current emergency level of 0.25 per cent, according to a report published Wednesday, shortly after Statistics Canada said inflation was its highest since 1991.

The U.S. Federal Reserve will lift the upper bound of its key policy rate to two per cent by the end of 2022, Scotiabank said.

The more aggressive expectations reflect a growing realization that inflation has now become the biggest risk to both economies, according to Scotiabank Chief Economist Jean-Francois Perrault.

“The simple reality is that the very serious public health impacts of omicron and the associated economic consequences do not outweigh the pressing need to withdraw monetary stimulus,” Perrault said in a report to investors.

Perrault forecasts the Bank of Canada will make its first move with a 25-basis-point hike at a policy decision on Jan. 26 and will follow that with another 25-point hike in March, and then move by 50 points in April — followed by three more hikes to get to two per cent.

“Even with this pace of tightening, the real policy rate would remain negative at the end of this year,” he wrote.

Canada’s policy rate was 1.75 per cent before the COVID-19 pandemic hit in early 2020.

via Financial Post