Is the Bank of Canada Going to Hike Rates Next Week? More People are Saying, “Yes!”

Canadian efforts to combat COVID-19 will almost certainly result in weaker economic growth than in the United States at the start of the year, but that hasn’t deterred investors from betting that the Bank of Canada will raise interest rates next week.

In order to curb the spread of the Omicron version of the coronavirus, Canadian provincial governments have imposed restrictions that are stricter than those in the United States and many other nations.

As a result, economists at some of Canada’s largest institutions are forecasting little or no GDP growth in the first quarter, compared to projections of 4% to 5% prior to the appearance of the variation.

“I see a lot more danger in the Canadian figures than in the US ones,” Doug Porter, chief economist at BMO Capital Markets, said.

However, analysts believe that once the limitations are eliminated, activity will swiftly resume.

It appears that investors are banking on it. After a central bank survey of companies pointed to greater wage pressures, money market data on Monday suggested the chances of the Bank of Canada announcing a rate rise on Jan. 26 had grown to about 70%.

That would be an earlier move than the Bank of Canada has indicated and a faster rate hike than the Federal Reserve of the United States, which is not projected to boost rates until March.

Next week, the Bank of Canada will provide its first estimate of economic growth for the current quarter.

“We believe the Bank of Canada will lower its Q1 prediction in January, as we have already done,” said Josh Nye, senior economist at Royal Bank of Canada. “However, the impact (of shutdowns) on inflation is less apparent,” he said.

“You may have some disinflationary pressure in some of the services sectors that are going to be impacted the worst by this, but when people are unable to go to work, that has an impact on supply.”

A increase in instances of the new variety is anticipated to burden the Canadian healthcare system in the coming weeks.

Only Italy was placed worse than Canada among G7 countries in terms of hospital and clinic capacity in the 2021 Global Health Security Index.

To combat Omicron, Ontario, Canada’s most populated province, temporarily halted indoor dining and switched schools to remote learning, among other measures, while Quebec restricted private meetings and enforced a night curfew throughout the province.

Nonetheless, Canada’s economy has the potential to outperform that of the United States for the whole year, as prior waves of the pandemic, as well as drought and chip shortages, hindered vehicle manufacturing in 2021.

In the fourth quarter of last year, Canada’s GDP is anticipated to have just just returned to its pre-pandemic high, two quarters later than the United States.

“There is plenty of space for Canada to catch up,” Porter said, predicting 4% growth in 2022.

“We believe that if we get over the first quarter’s hiccups in Canada, we will be able to outperform the US for the remainder of the year.”