We now look for two more consecutive 50 bp moves instead of one before. On April 13, also as expected, the Bank of Canada raised its target for the overnight rate by 50 bps to 1.00%, with the statement alerting that “interest rates will need to rise further.” This, too, was the first 50-pointer since May 2000. Somewhat surprisingly, the Bank ramped up its hawkish rhetoric. Governor Macklem said there was a “need to normalise monetary policy reasonably quickly”, raising rates “forcefully if needed”. The latter likely meant continued 50 bp increments although a 75-pointer wasn’t ruled out. Macklem also said that there was a potential “need to take rates modestly above neutral for a period.”
And, unexpectedly, the Bank raised its estimated range for the neutral rate by 25 bps to 2%-to-3%. This one-two punch (more hawkish rhetoric, higher neutral rates) led us to call for a couple of 50 bp rate hikes on June 1 and July 13 to get the policy rate to the bottom of the new range, which (at 2.00%) is already above the 1.75% peak from last cycle. Once there, as before, we expect a brief pause (“it may be appropriate to pause hikes once we get closer to the neutral rate”). Afterwards, we expect more cautious 25 bp moves every second meeting with the policy rate peaking near the top of the neutral range (2.75%) by April. The peak’s timing is the same as before, but the level is 25 bps higher.
The monthly average for 10-year Treasury yields is now expected to peak around 3.25% (up from 3% before), which is the highest level since 2011. And, importantly, we now expect the trend to remain above 3% through the end of next year. - BMO Capital Markets
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