Just one month ago, analysts predicted the first hike would come in the third quarter. But persistently high Canadian inflation , which accelerated to a 30-year peak in December, prompted some economists to bring forward their expectations.
Other major central banks, including the Federal Reserve and Bank of England , are expected to raise rates in the coming months to tackle multi-decade-high inflation despite an expected near-term hit to growth from restrictions related to the spread of the Omicron coronavirus variant.
Median forecasts in the Jan. 14-21 poll of 31 economists said the BoC would raise its key interest rate by 50 basis points to 0.75% next quarter and end the year with the rate at 1.00%. That compares with an end-year prediction of 0.75% in a December poll.
In the latest survey, taken mostly after the recent inflation release, nearly one-quarter of respondents, seven of 31, expected a rate hike next week when the Canadian central bank is set to publish updated quarterly economic forecasts.
Economists were nearly evenly split about a rate hike in the first quarter.
Financial market traders are pricing in an 85% probability of a lift-off in rates at the Jan. 26 meeting, with at least five increases in borrowing costs this year.
Reuters Poll: Bank of Canada monetary policy outlook https://fingfx.thomsonreuters.com/gfx/polling/lgvdwjyjypo/Reuters%20Poll%20-%20Bank%20of%20Canada%20monetary%20policy%20outlook.png
"I do think the risk around our forecast for three hikes is tilted to the upside ... But I think the market has probably gone a bit far in pricing more than five hikes," said Josh Nye, senior economist at Royal Bank of Canada.
"The BoC will want to raise rates a bit more gradually than that and we'll start to see some of these headline (inflation) rates coming down as soon as January as some of the earlier base effects come out of the year-over-year calculations."
All 15 respondents to an extra question said the risk was that BoC rate rises would come faster than they predicted. Three more rate rises were forecast for 2023, likely in line with expectations for the U.S. central bank, taking the Canadian central bank's key rate to 1.75%.
"Various (Fed) members have called for three or four rate hikes in the U.S. this year," said Christian Lawrence, senior strategist at Rabobank.
"And while the BoC is not at the mercy of Fed policy, in a follow-the-leader manner, a more hawkish Fed does reverberate across other central banks, particularly one that sits so close and whose economy is inextricably linked."
Reuters Poll: Canada's inflation and interest rate outlook https://fingfx.thomsonreuters.com/gfx/polling/egpbkjdjrvq/Reuters%20Poll%20-%20Canada's%20inflation%20and%20interest%20rate%20outlook.png
Canada's inflation rate was expected to average 4.5% this quarter and 4.1% in the next, easing off December's 4.8% reading. But those forecasts are sharply higher than the 3.7% and 3.1% predicted three months ago.
Inflation was expected to cool but will still be just above the BoC's 2.0% target throughout next year.
In the near term, pandemic restrictions likely led to a sharp slowdown in growth to just 1.5% this quarter, seasonally adjusted and annualized, from an expected 5.3% in the October-December period in 2021.
But economic growth was set to snap back sharply to 6.0% and 4.7% in the next two quarters.
Nearly two-thirds of respondents to an additional question, nine of 14, said the Omicron variant would have a milder impact on the economy compared with the Delta variant.
(For other stories from the Reuters global long-term economic outlook polls package:)
(Reporting by Shrutee Sarkar and Sarupya Ganguly; Polling by Vijayalakshmi Srinivasan and Indradip Ghosh; Editing by Ross Finley, Jonathan Cable and Paul Simao)
By Shrutee Sarkar and Sarupya Ganguly