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 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 make more interest rate moves to bring inflation back to target. Or we may have to move faster, we may have to take a bigger step,” Gov. Tiff Macklem said at a press conference on June 9. 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 headline inflation poised to test 8% in this month’s CPI report, the Bank of Canada’s task is clear in next week’s decision.” , said BMO Chief Economist Douglas Porter. he wrote 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 Britain, the highest among Group of Seven 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 remain 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 declines 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,” he 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 percent 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. But Professor Gordon said a rate rise of more than half a percentage point was justified, 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,” he 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 Professor Gordon and Mr Watt said that while the bank would not want to push the economy into recession, that could be the cost of reducing inflation. “I don’t think it would be something they would do eagerly, but if the return of inflation ended up requiring a recession, I think they would be prepared to do it at this time,” Mr Watt said. Your time is valuable. Deliver the Top Business Headlines newsletter to your inbox morning or night. Sign up today.
