Economists expect the Bank of Canada to raise its key rate by Wednesday

Economists predict the Bank of Canada will raise its key interest rate by three-quarters of a percentage point on Wednesday as inflation rages around the world.

In Canada, inflation hit a 39-year high of 7.7% in May, well above the 2% target rate central banks typically 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.

“We may have to take more action on interest rates to get inflation back on target. Or we may have to act faster, we may have to take a bigger step,” the official said. Governor Tiff Macklem at a June 9 press conference.

Most economists now expect rates to rise by three-quarters of a percentage point, following the example 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 task from the Bank of Canada is clear in next week’s decision, » BMO chief economist Douglas wrote. Porter in a weekly report on Friday.

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The CD Howe Institute’s Monetary Policy Council, a group of economists who assess the Bank of Canada’s monetary policy, has also called on the Bank to raise its key rate by three-quarters of a percentage point.

But high inflation is far from uniquely Canadian. Inflation in the United States hit a record high of 8.6% in May, while it was 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 said 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 are not going to cooperate, must they generate significant slowdowns in national economic activity?

Stephen Gordon, an economics professor at Université Laval, said the main reason for a bigger 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 wild, » Gordon said.

The most recent Bank of Canada Business Outlook Survey showed that Canadians believe inflation will remain higher than expected — and for some time.

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.

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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.

But Gordon said a rate hike of more than half a percentage point was warranted, adding 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, » Gordon 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 tries to get inflation under control, it is hoping for what is called a “soft landing,” where inflation is brought under control without triggering a recession.

Both Gordon and Watt said 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 that 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. Watt.

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