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Bank of Canada decision

The Bank of Canada’s Rate Decision: To Hike or Not to Hike

Over the past couple of weeks, markets have increasingly adopted the view that the Bank of Canada will move up the timing of its first rate hike to this week.

Yet, just a month ago the arrival of the Omicron variant had many investors paring back bets for Bank of Canada rate hikes this year.

What’s fuelling this growing sense of urgency for the Bank to raise interest rates sooner rather than later? The tide started to shift following the release of December’s inflation data, which confirmed a 30-year high inflation rate of 4.8%—and signs that inflation expectations are starting to set in—along with home prices that continue to climb higher. The average home price is now up over 26% over the past year, but has soared over 40% since January 2020.

But not everyone is convinced the Bank of Canada will be rushed into what would be its first rate hike in over three years.

Below, we look at the case economists are making both for a more expeditious Bank of Canada rate-hike timeline, and also for a more cautious approach, which sees the Bank waiting until its March or April meetings.

The case for a hike this week

TD Bank

“The efforts by the Fed to signal an early start to interest rate hikes mean that the Bank of Canada needs to be even more aggressive if it wants to lead the Fed in this cycle. The Bank will have good rationale to do so. The labour market in Canada continues to surprise to the upside and output is expected to rebound quickly from the Omicron setback.”

“From our view, the BoC is in the same high-pressure situation as the Fed, with markets pricing more than 75% odds of a quarter-point move at [this] week’s meeting. Furthermore, there is a real risk that Canadian house prices will see another leg up given the still-low interest rate environment. Though the BoC has stated that housing risks are more the prerogative of the federal government, it knows that keeping interest rates low for too long increases financial stability risks.” (Source)


“With the mortgage commitments soon arriving into the all-important spring housing market, the BoC faces the risk that failure to tighten policy set against the backdrop of high inflation will only drive a massive further gain in house prices that could prove to be destabilizing. This latter point is important. The BoC would not tighten policy just because of housing, but housing pressures on top of ripping inflation change the equation.”

“In all, bringing forward rate hikes are the best medicine for attempting to engineer a soft landing. Hard landing risks would rise if the BoC continues to look the other way while maintaining overly accommodative policy.” (Source)

The case for waiting until March or April


“If, as we expect, March brings an improvement on the Covid front, that month will also mark the start of a tightening cycle by the Fed with the Bank of Canada moving in April, aimed at keeping inflation running tame in 2023 and beyond as North America reaches full employment.”

“Our growth forecast trails that of the Bank of Canada, and is a reason why we see Governor Macklem’s team hiking only 75 bps in 2022, with an equal dose in 2023. While that’s tamer than some projections, the Bank has to be cognizant of a lagged impact on an indebted household sector when mortgages start coming due in 2024-25 at much higher rates than those they will be replacing.” (Source)

National Bank of Canada

“…despite an economic soft patch early in the year, inflationary pressures are such that we continue to think the central bank will start raising its policy rate in March…Eyebrows are being raised not only by inflation, but also by real estate. Signs of overheating in the housing market persist despite an astronomical 25% rise of prices during the pandemic.” (Source)

Too close to call


“The economic impact of the latest virus wave will very likely push unemployment back up in January, but disruptions will also likely be short-lived given the exceptionally rapid initial virus spread and accelerated roll-out of booster shots.”

“As a result, we don’t expect the Omicron variant to delay Bank of Canada rate hikes. Our forecast assumes the first increase in the overnight rate will come in April, although capacity/inflation/wage pressures in [the recent] BOS (Business Outlook Survey) data would argue that the first increase could come at any time, including in the next policy decision later this month.” (Source)

Latest Interest Rate Forecasts

The following are the latest interest rate and bond yield forecasts from the Big 6 banks, with any changes from their previous forecasts in parenthesis.

 Target Rate:
Year-end ’22
Target Rate:
Year-end ’23
Target Rate:
Year-end ’24
5-Year BoC Bond Yield:
Year-end ’22
5-Year BoC Bond Yield:
Year-end ’23
Scotia 2.00% (+75bps)2.50% (+25 bps)NA2.50% (+45 bps)2.60% (+25 bps)
TD1.25% 1.75%NA2.00% (+5 bps)2.05% (+10 bps)

Featured image source: David Kawai/Bloomberg via Getty Images