The Russian invasion of Ukraine is clouding the outlook, but Farm Credit Canada is still projecting further interest rate hikes this year.
The Bank of Canada will likely hike its key overnight lending rate four more times by 0.25 basis points each to bring it to 1.5% by the end of 2022, FCC senior economist Kyle Burak said in a website post on Friday.
Earlier this week, the Bank raised its policy rate by 0.25 points to 0.5%, the first increase since 2018. Given how hot inflation is running in Canada – 5.1% in January - most analysts were expecting rates to rise, after they were initially slashed to rock-bottom levels by the Bank in response to the start of the COVID-19 pandemic. Burak admitted the consensus from financial markets is for as many as five additional 25 basis points rate hikes in 2022, but said FCC sees that as a ‘slight overestimation.’
The magnitude of the rate increases will be largely influenced by the rate of business investment, how fast consumers deplete savings accumulated during the pandemic and the degree in which the Russia/Ukraine conflict impacts the Canadian economy, he said.
The US Federal Reserve is expected to be similarly aggressive with rate hikes, also projected to raise its policy rate to the top end range of 1.5% by end of the year. Inflation has been more prominent in the US, where it hit the highest level since 1982 in January at 7.5%.
Both the Canadian and US central banks could be forced to raise rates faster if inflation continues to rise, Burak said, but added invasion-related economic sanctions on Russia could also cause global economic growth to slow, resulting in increased uncertainty and slower rate increases.
“Despite the uncertainty, it would be prudent for businesses to prepare for increases in borrowing costs this year”, he said.
Click here to see more...