The Federal Reserve raising its key interest rate by three-quarters of a percentage point – its largest hike since 1994 – increases the odds of the Bank of Canada following suit next month, economists say.
The U.S. bank authority announced the Wednesday move will shift the country's benchmark rate to a range between 1.5 per cent and 1.75 per cent as it tries to tame soaring inflation.
While the Bank of Canada recently upped its interest rate by a half point two times in recent months, taking it to 1.5 per cent in June, governor Tiff Macklem has hinted he is prepared to act “more forcefully.”
Josh Nye, a senior economist with RBC Economics, believes Macklem is now even more likely to mirror the Fed.
“One of the top arguments against the bank acting more aggressively was just that the Fed wasn't expected to be that aggressive because before this week the Fed had taken those larger hikes off the table,” he said.
“If that was generally seen as reducing the odds that the Bank of Canada would do a larger hike, with the Fed now moving more aggressively with 75 basis points today, I think that really increases the odds that the Bank of Canada does the same.”
As soon as people began to predict the Fed would take a larger hike last week, Nye said he saw pricing for the next two Bank of Canada meetings moving up too and bond yields increasing.
CIBC economists Avery Shenfeld and Andrew Grantham feel similar about the odds of a three-quarters of a percentage point hike in Canada.
They see the Bank of Canada getting to 2.75 per cent this year, before a deceleration in growth and inflation convinces the bank to lay off hikes, they said in a note to investors.
Nye has also predicted the rate getting up to 2.75 per cent this year, but if inflation is not slowing, could see it even hitting three per cent.