Bank of Canada set for another big rate hike

The Bank of Canada is expected to announce another interest rate hike by 75 basis points today, marking a 14-year high. High inflation outweighs a possible recession. 

Five of Canada's six biggest banks expect that the Bank of Canada will go for a 75 basis point interest rate hike and predict that the rate will reach 4.0%. They are citing inflation figures, which were revealed last week and turned out to be higher-than-expected. The Bank of Canada's decision will be out at 10:00 a.m. ET (1400 GMT).

Money market participants believe that the probability of a more significant rate hike is roughly 70%. They expect the interest rate to peak at 4.5% in spring 2023. 

According to Benjamin Reitzes, Canadian rates & macro strategist at BMO Capital Markets, the Bank of Canada is likely to unveil another 75-basis point hike. He doesn't think policymakers are ready to back off yet. 

In addition to this, the central bank will publish its updated outlook for the economy of Canada and global economies. The economic projections are expected to be darker. However, they could also signal inflation drop. 

Simon Harvey, head of FX analysis at Monex Europe and Monex Canada, said the central bank would report the economic slowdown the authorities were striving for.

Harvey believes that the Bank of Canada will not consider a recession as a base case. Instead, the Bank will forecast stagnant economic growth. 

The rate of inflation dropped to 6.9% in September from a high of 8.1% in June, beating the central bank's expectations back in July. Inflation forecast averaged about 8% through the end of 2022.

According to analysts’ estimates, a return to the cherished 2% will be a long time coming. Canada expects inflation to return to 2% by the end of 2024. Short-term inflation expectations remain high, signaling that Bank of Canada Governor Tiff Macklem will continue to have a hawkish tone, at least now.

Andrew Kelvin, chief Canada strategist at TD Securities, notes that Maclem may not yet be ready to change the policy. However, he emphasizes that the central bank's forecasts have short shelf lives, and by early December the Bank of Canada governor may become more cautious.