BoC forecasts should be 'on the fiction shelves' says Scotiabank economist

Here's what Scotia's Derek Holt and other economists said following latest rate hike

BoC forecasts should be 'on the fiction shelves' says Scotiabank economist

The Bank of Canada was widely expected to hike interest rates again this week and did so, taking its overnight rate to 5%.

But the more interesting story was in the Monetary Policy Report that followed Wednesday’s rate decision which suggested continued tightening ahead, and this is where Scotiabank’s head of capital markets economics comes in.

He believes that the central bank is using its forecasts to avoid a scenario where medium-term rates fall too much and sparks housing market speculation. But he suggests you “shouldn’t take it too seriously versus doing your own homework.”

In a commentary following the rate decision, Holt said that the BoC “issued a set of forecasts straight out through to 2025 that deserves a place on the fiction shelves at your favourite bookstore or the virtual equivalent.”

For example, he questions Governor Tiff Macklem’s assertion that Canada will avoid recession, saying that although “we can’t reject the slim possibility that they may prove to be right,” the BoC cannot forecast recession because of both the political cost and cost to the central bank being high.

He also believes that the BoC is using ‘stealth forward guidance’ to avoid speculation about rate cuts and a rally in five-year government of Canada debt.

What’s next for rate hikes?

Scotiabank’s Holt says that “for now, I would tentatively pencil in a further hike at the September or October meeting especially if data surprises higher, but each decision is being communicated as data dependent and there is a lot of data over the next eight weeks until the September decision that could affect the call.”

RBC Economics’ assistant chief economist, Nathan Yanzen says his team have a more pessimistic outlook than the BoC and that there should be another pause in rate hikes.

“We see more signs that the economic backdrop is softening as the unemployment rate edges higher, inflation expectations trend lower and intensity of labour shortages ease (according to the last Business Outlook Survey),” he wrote in a commentary.

TD Economics’ Rishi Sondhi agrees that holding rates steady may be the right choice.

“The onus is on the incoming data, which we think will show enough weakness over the coming months for policymakers to remain on hold for the next few quarters,” he wrote. “We're already seeing signs that job markets are softening, with vacancies well below prior peaks, the unemployment rate on the rise, wage growth beginning to moderate.”

Randall Bartlett, senior director of Canadian economics at Desjardins concluded that there is a chance of another hike in September, but that “we continue to believe that this will be the final rate hike for this cycle.”