Bank of Canada Preview: Expects 75bps Rate Hike

 This paper summarizes the developments leading up to the Bank of Canada (BOC) Monetary Policy Meeting (hereafter, the policy meeting), whose results will be announced on Sep 7th. The market expects the BOC to raise the policy rate from 2.50% to 3.25% at this policy meeting. At the last policy meeting in July, the BOJ raised interest rates by 100bps for the first time since August 1998, but this time it is expected to be reduced to 75bps.

 At the end of August, we expect Canada's policy rate to rise to 3.75% by the end of the year and remain flat next year. Following a 75 basis point hike in September, the rate hikes are expected to fall to 25 basis points each in October and December. The main reason for this is that the economic indicators for July showed signs of a slowdown in Canada's economy and a peak in inflation. Monthly real GDP (preliminary estimate) decreased by 0.1% from the previous month, and retail sales (preliminary estimate) decreased by 2.0% from the previous month, both of which turned downward. In addition, the consumer price index (CPI) increased by 7.6% year-on-year, slowing down from June's (8.1% increase year-on-year).

 However, BOC's stance of continuing to raise interest rates to curb inflation has not changed. After the last policy meeting in July, President Tiff Macklem BOC pointed out: "it is necessary to rapidly raise the policy interest rate to the upper limit of the range of 2-3 neutral interest rates, or slightly higher." In addition, around the signs of inflation blunting, he said that "our business will not end until the price rise rate returns to the target of 2%," maintaining the posture of continuing to increase interest rates.

 At the time of writing, short-term money markets are pricing in a rate hike to 3.75% by April next year, while some in the market are also predicting a rate cut from early 2024. At the September policy meeting, we want to confirm how the BOC itself will assess the economic and price implications of a sudden BOC rate hike. Market attention may gradually shift