Towards a 75-point hike in Bank of Canada interest rates

Consumer and business inflation expectations have risen over the past quarter, marked by rising food and fuel costs.

Posted at 11:03 am

Andre Dubuc

Andre Dubuc
The press

Under the circumstances, the Bank of Canada is more than likely to hike interest rates by 75 basis points on July 13, economists at RBC and BMO say.

The target for the overnight interest rate would thus increase from 1.50% to 2.25%, while the official bank rate would be 2.50% from the current 1.75%.

call everyone

Would a 75 point hike in the Bank of Canada interest rate mess up your budget? Have you started to feel the effects of the previous hikes?

The Bank of Canada released the latest deliveries of theCanadian Consumer Expectations Survey and from theBusiness Outlook Survey.

“Short-term inflation expectations have reached record highs, with prices expected to reach +6.8% yoy in one year (vs. +5.1% in Q1), while in two years’ time expected gains of +5.0% yoy (vs. +4.6%),” wrote BMO economist Priscilla Thiagamoorthy in a note to clients.

Long-term expectations have increased significantly in the second quarter of 2022. Consumers believe that five years from now, in 2027, inflation will be close to 4% per year, twice the target rate set by the Bank of Canada.

“This last figure is particularly worrying, comments his colleague Shelly Kaushik, as it suggests long-term expectations could be moving away from the bank’s target; However, it remains below the pre-pandemic peak of 4.3% in the second quarter of 2018.”

It is important to closely monitor developments in inflation expectations in the country, as the International Monetary Fund noted in a 2018 text: “In many countries, the main driver of inflation is based on the long-term developments in inflation expectations. The logic is that if many people believe that goods and services will cost more next year, they will increase their purchases this year in order to save, which will result in the demand for this good increasing and consequently materializing the feared price increase sooner rather than later.

Of course, other factors also contribute to inflation, the IMF acknowledges, “excess productive capacity and external price pressures”.

business pressure

On the corporate side, short-term inflation expectations have also risen. They believe inflation will remain high longer than they expected in the last survey, “despite the bank’s move to more aggressive tightening in the spring,” notes caustic.

“Almost a quarter of companies expect inflation to remain well above 2% for at least three years,” the report said. In the first quarter survey, it was 14% of companies.

“We believe today’s survey only increases the likelihood that the central bank will follow the US Federal Reserve with a hike of at least 75 basis points in July,” RBC said in a comment published on Monday.

“The continued rise in inflation expectations only reinforces our expectations of a 75 basis point hike at next week’s monetary policy meeting,” BMO added.

The central bank has an inflation target of 1% to 3% for the country, with a median rate of 2%. Most economists at Canada’s big banks are still forecasting a return to inflation of 2% by 2024. Last week, Deloitte economist Mario Iacobacci broke consensus by forecasting a return to normal by 2025 at the latest.

“In order to get back on track, the companies identified a number of conditions that should be met, including higher interest rates, improved supply chains, lower oil prices and an end to the conflict in Ukraine,” says BMO.

Salary increases in sight

Within firms, expected wage growth rose to 5.8% next year, from 5.2% in the first quarter and 4% a year ago. “Hiring intentions remain high, but competition between firms has pushed up wages to attract and retain workers, with most firms citing rising cost of living as a key driver of wage growth. Looking ahead, we expect wage pressures to become a bigger issue in the second half of the year,” says Kaushik by BMO.

Leave a Comment