Will the Bank of Canada hike interest rates next week? More investors saying yes

Money market data shows the chances of the Bank of Canada announcing a rate hike on Jan. 26 have increased to nearly 70 per cent.

Canadian restrictions to tackle COVID-19 will likely come at a cost of slower economic growth at the start of the year than in the United States, but that has not stopped investors from raising bets the Bank of Canada will hike interest rates next week.

With hospital capacity stretched, Canadian provincial governments have rolled out restrictions that are tighter than in the United States and many other countries to slow the spread of the Omicron variant of the coronavirus.

As a result, economists at some of the large Canadian banks expect little or no GDP growth in Canada in the first quarter compared to estimates of about four per cent to five per cent before the emergence ofthe variant.

“I see much more risk to the Canadian numbers than the U.S. numbers, simply because we are seeing much more important restrictions in Canada,” said Doug Porter, chief economist at BMO Capital Markets.

But economists also say that activity is likely to rebound quickly when restrictions are lifted.

Investors seem to be counting on it. Money market data on Monday showed the chances of the Bank of Canada announcing a rate hike on Jan. 26 have increased to nearly 70 per cent after a central bank survey of businesses pointed to higher wage pressures.

That would be an earlier move than the Canadian central bank has been signaling and a quicker lift-off than in the United States where the Federal Reserve is not expected to raise rates until March.

The BoC will provide for the first time next week its estimate of economic growth in the current quarter.