The Bank of Canada is likely to raise its benchmark interest rate by another half a percentage point on June 1, further increasing the cost of borrowing to meet “persistent” inflation levels that have not been seen in 30 years, economists predict.
All economists who spoke to Global News said they expect the central bank’s key interest rate to rise to 1.5 percent on Wednesday.
Money markets are also valuing a 50 basis point increase, economists confirmed.
This move would be the second consecutive jump of 50 basis points from the central bank. The last time we raised rates by half a percentage point in consecutive decisions was almost 25 years ago, in December 1997 and January 1998.
2:01 Adhesive Clash: Tackling Rising Cost of Inflation in Canada Adhesive Clash: Tackling Rising Cost of Inflation in Canada – May 12, 2022
Benjamin Reitzes, a Canadian tax strategist and macro strategist at BMO Capital Markets, told Global News that the rise is expected to be due to inflation figures that remain high during the first half of 2022.
The story continues under the ad
The 6.8% inflation rate recorded last month was well above the Bank of Canada’s inflation forecast released in early April, which set year-on-year price growth at around six per cent. the second quarter of the year.
Read more: Inflation Calculator: How Does Rising Prices Affect Your Personal Finance?
Gasoline prices are among areas that are expected to continue rising in May, he said, giving the Bank of Canada many concerns in efforts to reduce rising cost of living.
“Inflation is still the main story here. The Bank of Canada wants to curb inflation and they are doing so by raising rates,” he said.
Inflation is exceeding initial expectations in part due to the protracted war in Ukraine, according to TD Bank senior economist James Orlando.
At the start of the conflict, economists had expected a “temporary rise” in prices due to gas and food supply chain constraints, but the impacts three months after the war are “broader” and “much more persistent.” of what was thought, “Orlando explained. Blockages of COVID-19 in China that contribute to global supply chain problems are among other factors.
Other central banks are also in a rate hike cycle, with the US Federal Reserve also taking a half-percentage point step in early May.
The story continues under the ad
7:17 US Federal Reserve raises interest rates by 0.5% to curb inflation US Federal Reserve raises interest rates by 0.5% to curb inflation – May 4, 2022
Is there a 75 bps rise in the charts?
While consensus for Wednesday’s decision is gathering around 50 basis points, economists who spoke to Global News said a more aggressive increase of 75 basis points is not in doubt.
Trend stories
-
Punjabi singer Sidhu Moose Wala shot dead in India while police investigate Canadian gang links
-
Texas has some of the least restrictive gun laws. But that is what the state limits
Tu Nguyen, an economist at RSM Canada, said that while the idea of such a leap in January would have been inconceivable, it is “certainly possible” today.
The story continues under the ad
Nguyen believes that the move by 75 basis points is unlikely, however, to avoid the risk of a stronger economic downturn.
“I think the bank would stay with the 50 basis point increase. They don’t want to scare the economy too much,” he said.
Read more: Concerns over global financial crisis grow at World Economic Forum meeting in Davos
Reitzes agreed, saying a 75 basis point increase would be a “more extreme move” that would not be in line with the central bank’s message about interest rates so far.
While the Bank of Canada is keen to take advantage of the country’s strong economy, two rate hikes earlier this year have already had a cooling effect in sectors such as the housing market, where home sales they are slowing down and prices are showing declines. in some cities.
Orlando said the real estate market has “made a 180” since just a few months ago, when buyers rushed in before prices went up, until today when Canadians are sitting on the sidelines watching as prices could fall.
2:07 Sticker Shock: Housing inflation in Canada keeps potential buyers on the sidelines. Sticker Shock: Housing inflation in Canada keeps potential buyers on the sidelines
When will rate hikes stop?
The current one-percent benchmark rate is still boosting the economy, Orlando said, and the same central bank said earlier this year that rates should increase from two to three percent. before the bank’s monetary policy really took off. the foot out of the gas.
The story continues under the ad
He expects another 50 basis point increase in July to bring the bank rate to two percent, with another likely rise in September.
Reitzes predicted the same and said the bank will likely take stock of the impact of rising rates on inflation and the economy in the fall.
Read more: Fixed or variable? How To Choose A Mortgage As Interest Rates Rise
Nguyen also expects the Bank of Canada to continue raising rates until September, as the bank has some “leeway” to raise its rate without seriously risking a recession in Canada’s “overheated economy”.
The Bank of Canada will use that track to raise rates as it seeks to maintain its “credibility” as a central bank fighting inflation, Orlando said.
If you do not use your main policy tool to curb inflation, the expectations of perpetual price growth could seep into the minds of consumers and businesses. If sentiment changes and long-term inflation is expected, workers will push for higher wages and companies will plan to shift these high costs to consumers, forming an endless cycle of inflation.
Read more: Do you want to increase as inflation rises? This is a good time to ask, experts say
“If people believe that the Bank of Canada will be successful in curbing inflation in the future … it allows the Bank of Canada to be more effective in doing that work,” Orlando said.
The story continues under the ad
The Bank of Canada’s latest consumer and business outlook surveys in early April showed that while inflation expectations remain high in the short term, Canadians remain confident that pressures will ease in the long run.
“The good news is that there is still the belief that this will be something that will eventually slow down,” Orlando said.
© 2022 Global News, a division of Corus Entertainment Inc.