Bank of Canada to raise key interest rate by 0.75%, economists say

OTTAWA-

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

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

The Bank of Canada raised its key interest rate by half a percentage point on June 1, taking it to 1.5 percent. Since then, he has signaled a willingness to move in a more aggressive direction.

“We may need to take more action on interest rates to get inflation back on target. Or we may need to move faster, we may need to take a bigger step,” Governor Tiff Macklem told a conference call. press release on June 9.

Most economists now forecast a rate hike of three-quarters of a percentage point, following the lead of the US Federal Reserve, which raised its key rate by that amount last month.

“With the economy essentially at full employment, wages beginning to move significantly, and headline inflation set to test eight per cent in this month’s Consumer Price Index report, the Bank of Canada’s task is clear in the decision. next week,” wrote BMO chief economist Douglas. Porter in a weekly report on Friday.

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

But high inflation is far from being a uniquely Canadian phenomenon. Inflation in the United States reached an all-time high of 8.6 percent in May, while it reached 9.1 percent in the United Kingdom, the highest rate among the G7 countries.

The Bank of Canada has identified both domestic and international factors that lead to skyrocketing inflation. Domestically, the bank says there is excess demand in the economy, while globally, supply chain issues and the war in Ukraine continue to push prices higher.

HSBC Chief Economist David Watt said the Bank of Canada can reduce inflation driven by 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 have when we discuss central banks is whether global inflation is going to stay high, whether they have a mandate to bring inflation back below three or two percent and international inflation is not going to cooperate. Do they have to generate significant slowdowns in domestic economic activity?”

Laval University economics professor Stephen Gordon said the main motive behind further rate hikes would be to rein in inflation expectations.

“If the bank goes up more than 50 basis points, I think the reasoning is that they want to make sure expectations don’t get too crazy,” Gordon said.

The Bank of Canada’s most recent business outlook survey showed that Canadians believe inflation will remain higher than previously expected, and for a while. Canadians expect inflation to be 4 percent within five years, according to the survey.

Economists worry when people and businesses begin to anticipate high inflation, as expectations affect future prices for goods and services, as well as wage negotiations.

However, a recent report by the Canadian Center for Policy Alternatives warned that rapidly rising interest rates are likely to push the Canadian economy into recession and could cause significant “collateral damage,” including the loss of 850,000 jobs.

But Gordon said a rate hike of more than half a percentage point is warranted, adding that fears of a recession are premature.

“I don’t think we’re close to that risk yet, because the policy rate is still low and the economy is doing very well,” Gordon said.

On Friday, Statistics Canada said the unemployment rate in June fell to a record low of 4.9 percent, pointing to a strong job market.

As the bank tries to control inflation, it is hoping for what is known as a “soft landing,” in which inflation is brought under control without triggering a recession.

Both Gordon and Watt said that while the bank would not want to push the economy into a recession, that could be the cost of reducing inflation.

“I don’t think it’s something they would enthusiastically do, but if bringing inflation back ends up requiring a recession, I think they would be prepared to do it at this point,” Watt said.


This report from The Canadian Press was first published on June 10, 2022.

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