Economists predict the Bank of Canada will raise its key interest rate by three-quarters of a percentage point on Wednesday as global inflation soars.
In Canada, inflation reached a 39-year high of 7.7% in May, well above the target rate of 2.0% that central banks usually aim for.
The Bank of Canada raised its key rate by half a percentage point on June 1, bringing it to 1.5%. Since then, he has signaled a willingness to move in a more aggressive direction.
The Governor of the Bank of Canada had indicated at a press conference on June 9 that further interest rate measures may need to be taken to bring the interest rate back to the desired target.
Most economists now expect rates to rise by three-quarters of a percentage point, following the lead of the US Federal Reserve, which raised its benchmark rate by that amount last month.
“With the economy essentially at full employment, wages starting to move significantly and headline inflation poised to test 8% in this month’s Consumer Price Index report, the The Bank of Canada’s task is clear in next week’s decision,” BMO chief economist Douglas Porter wrote in a weekly report on Friday.
The CD Howe Institute Monetary Policy Council, a group of economists who assess the Bank of Canada’s monetary policy, also called on the bank to raise its key rate by three-quarters of a percentage point.
However, high inflation is far from uniquely Canadian. In the United States, it reached a record high of 8.6% in May, while it stood at 9.1% in the United Kingdom, the highest rate among the G7 countries.
The Bank of Canada has identified both domestic and international factors leading to a surge in inflation. Domestically, the bank says there is excess demand in the economy, while globally, supply chain issues and the war in Ukraine continue to put upward pressure. on prices.
HSBC Chief Economist David Watt clarified that the Bank of Canada can reduce inflation due to domestic factors, but when it comes to global factors such as oil prices, the bank is in a more difficult situation.
“One of the issues we face when discussing central banks is whether global inflation is going to stay high, whether they have a mandate to bring inflation down below 3-2%, and whether international inflation does not cooperate, should they generate significant slowdowns in national economic activity? »
Stephen Gordon, an economics professor at Laval University, pointed out that the main reason for a larger rate hike would be to contain inflation expectations.
“If the bank goes over 50 basis points, I think the reasoning is that they want to … make sure expectations don’t get too crazy,” Gordon added.
The most recent Bank of Canada Business Outlook Survey showed that Canadians believe inflation will stay higher than expected — and for a while. Canadians expect inflation to be 4% in five years, according to the survey.
Economists worry when individuals and businesses begin to expect high inflation, as expectations impact future prices of goods and services as well as wage negotiations.
However, a recent report by the Canadian Center for Policy Alternatives warns that rapidly rising interest rates will likely push the Canadian economy into a recession and could cause significant “collateral damage”, including 850,000 job losses.
Still, Gordon said a rate hike of more than half a percentage point was warranted, adding that fears of a recession were premature.
“I don’t think we’re close to that risk yet, because the policy rate is still low and the economy is working very well,” he said.
On Friday, Statistics Canada said the unemployment rate in June fell to a record low of 4.9%, indicating a strong job market.
As the bank attempts to bring inflation under control, it is hoping for what is known as a “soft landing,” where inflation is brought under control without triggering a recession.
MM. Both Gordon and Watt explained that even if the bank did not want to drag the economy into a recession, that could be the cost of bringing inflation down.
“I don’t think it would be something they would do in a hurry, but if inflation returns eventually necessitates a recession, I think they would be prepared to do that right now,” he said. Mr Watt.