“The risks around a 5% terminal rate are skewed to the upside, but our forecast assumes incoming data will soften enough over the summer for the BoC to resume its pause in September,” bank economists Nathan Janzen and Claire Fan said.
RBC is expecting the US Federal Reserve to follow suit by hiking its own key rate by 25 basis points in the coming weeks before leaving that rate untouched next time around.
Are interest rate hikes having an impact on the global and Canadian economies?
There are some signs of “cracks in the economic backdrop” globally, according to Janzen and Fan, with manufacturing activity softening amid cooler consumer demand for goods and slowing growth in China.
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Banks continue to tighten their credit conditions despite easing concerns about the stability of the US financial system, while the impact of rate increases is expected to become clearer down the line.
“Household delinquency rates are already rising despite exceptionally strong labour markets as higher prices and debt payments cut into household purchasing power,” the report authors noted. “And those unemployment rates will not stay this low as labour demand continues to show early signs of cooling.”