Economists expect the Bank of Canada to raise its key interest rate by three-quarters of a percentage point on Wednesday as inflation rages globally. In Canada, inflation hit a 39-year high of 7.7 percent in May — well above the two percent target rate that central banks typically aim for. The Bank of Canada raised its key interest rate by half a percentage point on June 1 to 1.5%. Since then, he has signaled a willingness to move in a more aggressive direction. “We may need to take more rate steps to bring inflation back to target. Or we may need to move faster, we may need to take a bigger step,” Governor Tiff Macklem said at a June 9 news conference. Most economists now forecast a rate hike of three-quarters of a percentage point, following the lead of the U.S. Federal Reserve, which raised its key interest rate by that amount last month. “With the economy essentially at full employment, wages starting to materialize and inflation poised to test eight per cent in this month’s consumer price index report, the Bank of Canada’s task is clear in next week’s decision ,” wrote BMO Chief Economist Douglas. Porter in a weekly report on Friday. The CD Howe Institute’s Monetary Policy Council, a group of economists that provides an assessment of the Bank of Canada’s monetary policy, also called on the bank to raise its key interest rate by three-quarters of a percentage point. But high inflation is far from an exclusively Canadian phenomenon. Inflation in the United States hit a record high of 8.6 percent in May, while it reached 9.1 percent in the United Kingdom, the highest among G7 countries. The Bank of Canada has identified both domestic and international factors leading to a spike in inflation. Domestically, the bank says there is excess demand in the economy, while globally, supply chain problems and the war in Ukraine continue to put upward pressure on prices. HSBC chief economist David Watt said the Bank of Canada can reduce inflation due to domestic factors, but when it comes to global factors such as oil prices, the bank is in a more difficult position. “One of the issues we face when we talk about central banks is if global inflation is going to stay high, if they have a mandate to bring inflation back below 3 to 2 percent and international inflation is not going to cooperate, they have to create significant falls in domestic economic activity?’ Laval University economics professor Stephen Gordon said the main reason behind a bigger rate hike would be easing inflation expectations. “If the bank goes above 50 basis points, I think the rationale is that they want to make sure that expectations don’t get too wild,” Gordon said. The Bank of Canada’s latest business outlook survey showed Canadians believe inflation will remain higher than previously expected — and for a while. Canadians expect inflation to be at 4% five years from now, according to the survey. Economists worry when people and businesses begin to expect high inflation, as expectations affect the future pricing of goods and services as well as wage negotiations. But a recent report from the Canadian Center for Policy Alternatives warned that a rapid rate hike would likely send the Canadian economy into recession and could cause significant “collateral damage,” including 850,000 job losses. However, Gordon said a rate hike of more than half a percentage point was warranted, adding that recession fears were 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 reported that the unemployment rate in June fell to a record low of 4.9 per cent, pointing to a strong labor market. As the bank tries to curb inflation, it is hoping for what it refers to as a “soft landing,” where 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 recession, that may be the cost of reducing inflation. “I don’t think it would be something they would eagerly do, but if the return of inflation ends up requiring a recession, I think they would be prepared to do that right now,” Watt said. This report by The Canadian Press was first published on June 10, 2022.
