Bank of Canada | A key interest rate of 2.25% is expected on Wednesday

(OTTAWA) Economists are predicting that the Bank of Canada will hike interest rates by three-quarters of a percentage point on Wednesday as global inflation soars.

Posted at 5:07pm

Nojoud Al Mallees
The Canadian Press

In Canada, inflation hit a 39-year high of 7.7% in May, well above the 2.0% target that central banks normally aim for.

The Bank of Canada raised interest rates by half a percentage point on January 1ah June to 1.5%. He has since signaled a willingness to move in a more aggressive direction.

The Bank of Canada Governor hinted at a June 9 news conference that further interest rate action may be needed to bring interest rates back on target.

Most economists now expect interest rates to rise by three-quarters of a percentage point after the US Federal Reserve raised interest rates by that amount last month.

“With the economy essentially at full employment, wages starting to move significantly and headline inflation set to test 8% in this month’s CPI report, the Bank of Canada’s role in next week’s decision is clear,” BMO Chief Economist Douglas Porter wrote in a weekly report on Friday.

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

A global phenomenon

However, high inflation is anything but typically Canadian. In the United States it reached a record 8.6% in May, while in the United Kingdom it reached the highest rate among the G7 countries at 9.1%.

The Bank of Canada has identified both domestic and international factors that are causing inflation to rise. Domestically, there is excess demand in the economy, according to the bank, while global supply chain problems and the war in Ukraine continue to put downward pressure on prices.

HSBC Chief Economist David Watt clarified that the Bank of Canada can reduce inflation based on domestic factors, but when it comes to global factors like oil prices, the bank is in a more difficult position.

“One of the issues we face when discussing central banks is whether global inflation will stay high, whether they have a mandate to bring inflation below 3-2%, and whether international inflation is not cooperating, if it should lead to a significant slowdown in national economic activity? »

Stephen Gordon, an economics professor at Laval University, pointed out that the main reason for a bigger rate hike is to contain inflationary expectations.

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

The Bank of Canada’s latest Business Outlook Survey showed that Canadians believe inflation will remain higher than expected — and will do so for a while. According to the survey, Canadians expect inflation to reach 4% in five years.

Economists worry when individuals and businesses start expecting high inflation, as expectations affect future prices of goods and services and wage negotiations.

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

Still, Gordon said a rate hike of more than half a percentage point was warranted, adding that fears of a recession were premature.

“I don’t think we’re close to that risk because interest rates are still low and the economy is working very well,” he said.

On Friday, Statistics Canada said the unemployment rate fell to a record low of 4.9% in June, signaling a strong labor market.

As the bank tries to bring inflation under control, it is hoping for a so-called “soft landing” where inflation is brought under control without triggering a recession.

MM. Both Gordon and Watt explained that even if the bank didn’t want to drag the economy into recession, that could be the price of cutting inflation.

“I don’t think they would be in a rush to do it, but if the return of inflation eventually necessitates a recession, I think they would be willing to do it now,” Mr Watt said.

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