The Bank of Canada is expected to raise its one-day rate by 50 basis points on June 1. (REUTERS / Blair Gable)
The Bank of Canada is expected to raise its one-day rate by 50 basis points on Wednesday as it tries to fight soaring inflation to return to its two per cent target.
Economists widely predict that the central bank will raise its one-day rate on Wednesday to 1.5 percent, marking its second consecutive rise of 50 basis points. The initial rise of 50 basis points in April was the largest increase in interest rates in 22 years. When the bank raises its interest rate to one day, it is usually a quarter of a percent at a time.
But rising inflation has forced the Bank of Canada to take an aggressive path to tighten monetary policy.
A Reuters poll of 30 economists found that everyone expects the Bank of Canada to raise the one-day rate by 50 basis points. Just a month ago, economists forecast a 25 basis point rise in June.
The price of almost everything has risen in recent months, with inflation reaching a three-decade high of 6.8% in April. The eight main components of the Consumer Price Index (CPI) rose this month, and food and house prices are accelerating faster than in March. Canadians paid almost 10 per cent more for groceries in April, the largest increase since September 1981.
“Since the April meeting, the Bank has maintained a consistent tone, leaving little reason to believe that it will deviate from the rate of 50 basis points. Inflation remains well above target and is likely to accelerate even further. in the coming months “, Benjamin Benjamin, BMO Capital Markets Economist. Reitzes wrote in a note.
“It is clear that the Bank of Canada was greatly underestimating the momentum of inflation, which reinforces its desire to return political rates to at least neutral, which the Bank believes is in the range of two to three per cent.” as soon as possible. “
Reitzes says he expects a third 50 basis point rise in July, when the central bank will slow down. An additional half-point rise would bring the benchmark rate to 2 percent, a level not seen since 2008.
The story goes on
CIBC Capital Markets senior economist Andrew Grantham echoes Reitzes’ expectation of another “disproportionate move” in July, which would bring the rate to the bottom of the bank’s neutral range between the two and three percent.
“However, after that, signs of a slowdown in the domestic economy and local inflationary pressures should slow the rate of rate hikes, and we still suspect that the Bank will not have to take rates above 2.5 percent in order for growth slow enough to reduce inflation to its 2% target by 2023, “Grantham wrote in a note.
While markets have raised prices by 50 basis points, some economists have not ruled out the possibility that the central bank will be even more aggressive than expected and raise the one-day rate by 75 basis points on Wednesday.
“Given that the Governor of the Bank of Canada, Tiff Macklem, told us in April that the Bank will no doubt be ‘thinking of taking another 50 basis point step’, it is not surprising that the market is fully supporting this move on June 1, “the ING economist said. James Knightley and strategist Francesco Pesole wrote in a note.
“We would argue that the possibility of a 75 basis point rise cannot be ruled out, given the current macro environment.”
Rising rates have already begun to cool the hot Canadian property market. Prices fell 6.3 per cent in April from the previous month, while sales fell 12.6 per cent, according to the Canadian Real Estate Association.
With Reuters files
Alicja Siekierska is a senior journalist for Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.
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