Bank of Canada Q3 2022 rate hike expected, Q2 rise possible: Reuters poll

By Swathi Nair and Sarupya Ganguly

BENGALURU (Reuters) - The Bank of Canada will raise interest rates by the end of the third quarter next year, according to nearly all economists polled by Reuters, with a growing minority expecting a first hike as early as end-June.

Those expectations, based on the view inflation is less transitory than thought, come despite the emergence last month of the Omicron coronavirus variant, which has clouded the economic recovery outlook around the globe.

Over 95% of economists, 26 of 27, expected at least one hike by the end of the third quarter of 2022, the Nov. 29-Dec. 3 Reuters poll found.

That is much more conclusive than a poll in October when economists were split over the chances of a Q3 hike. Now 19 of 20 common contributors expect at least one rise by end-September compared with 11 in October's poll.

All 29 contributors expected the Bank of Canada to keep rates unchanged at 0.25% at its Dec. 8 meeting.

"The Bank of Canada will raise rates in the third quarter of 2022...the elevated rate of inflation is putting pressure on the Bank of Canada and the Fed, but there is a hesitance to raise rates and risk stunting the recovery," said Brendan LaCerda, senior economist at Moody's (NYSE:MCO) Analytics.

"As such, early 2022 is the critical juncture. If all goes to plan and inflation cools, then the pressure to act dissipates. If not, then we would expect the timeline for rate increases to shift forward significantly."

Canada's annual inflation, at an 18-year high https://www.reuters.com/world/americas/canadas-annual-inflation-rate-hits-47-oct-highest-since-feb-2003-2021-11-17, has aligned a significant minority of economists with more aggressive pricing in interest rate futures markets.

About 45% of respondents, or 13 of 29, expected at least one rate hike by mid-2022, in contrast to no one expecting such a move in the October poll.

"The economy is growing strongly and inflation will soon breach 5%," said James Knightley, chief international economist at ING, who expected a first hike as soon as next quarter and four 25 basis point rate hikes in 2022.

"We are reluctant to make any changes to this view right now given the uncertainty over Omicron, but the obvious risk is the BoC ends up delaying the first hike until Q2 should consumer caution kick in on COVID anxiety."

Asked in an additional question when should the BoC raise rates, half of 18 economists said July 2022.

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"At this point, there's still a lot of uncertainty on how the new COVID variant might alter the near-term outlook. It could keep inflation elevated by disrupting global supply chains, while also depressing services consumption growth in Canada," said Avery Shenfeld, CIBC.

"A rate hike near mid-2022 might be appropriate, but these fresh clouds on the horizon imply the Bank should avoid being too specific at this point on when they see the first hike coming."