Rates could rise to 3% from 2.25% by the middle of next year
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Investors have increased their bets the Bank of Canada will hike interest rates in December and beyond, with rates peaking at three per cent, after the central bank on Wednesday announced a seventh consecutive hold at 2.25 per cent.
Bets for a December hike of 25 basis points rose to nearly 90 per cent on Wednesday via the overnight swaps market — used by investors and financial institutions to manage short-term interest rate risks — up from about 60 per cent the day before the rate announcement.
Bets for hikes in 2027 increased, too, with investors going all in on one 25-basis-point hike in January and some betting on as many as three hikes by mid-year.
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“That seems excessive to me,” Royce Mendes, managing director and head of macro strategy at Desjardins Group, said. “There is a necessary amount of tightening that will eventually be justified by the data, but I would say the level implied by market pricing seems excessive.”
But he said swap investors don’t have it completely wrong.
Mendes is calling for 50 basis points of rate hikes in the first half of next year based on Desjardins’ assessment that the Bank of Canada is more worried about inflation leaking into other parts of the economy after the U.S. war on Iran recently entered its seventh month.
