The Bank of Canada can emulate the Federal Reserve

The Bank of Canada has raised its key interest rate by half a point twice in recent months, to 1.5% in June, and its governor, Teff McClem, has hinted it is ready to act “more aggressively”.

Economist Josh Nye of RBC Economics thinks Teff McClem is now likely to emulate the Fed.

He explained that “one of the main arguments for the bank not to act more aggressively was simply that the Fed was not supposed to be aggressive because they said before this week that they would not go to this kind of larger increases.”

“While this has been generally seen as reducing the likelihood of the Bank of Canada increasing further, I think the fact that the Fed is now acting more aggressively with 75 basis points today really increases the likelihood that the Bank of Canada will do the same.”

Once people started expecting the Federal Reserve to make a bigger hike last week, Josh Nye saw expectations for the next two Bank of Canada hikes, as well as bond yields.

CIBC economists Avery Shenfield and Andrew Grantham agree on the potential for a three-quarter percentage point increase in Canada.

In a note to investors, they said they see the Bank of Canada’s key interest rate as high as 2.75% this year, before slowing growth and inflation convince the bank to halt increases.

Josh Nye also expected the rate to reach 2.75% this year, but added that it could reach 3.0% if inflation does not slow.

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