Markets Outperform Central Banks in Interest Rate Predictions

Bank of Canada Governor Tiff Macklem says domestic data will guide interest rate decisions, but some analysts believe markets are ahead in predicting central bank actions. According to National Bank strategist Ethan Currie, betting markets have correctly called interest rate hikes so far this year.

Currie notes that five major central banks have raised rates in 2022, including the United States Federal Reserve, European Central Bank, Bank of Japan, and Reserve Bank of Australia. In each case, overnight index swaps (OIS) markets bet on rate increases due to inflation from elevated crude prices.

The OIS market now gives a 60% chance of a Bank of Canada interest rate hike at its next meeting on October 28, up from about 30% in early September. Bets for a December rate hike are fully priced in.