Economists are predicting the Bank of Canada will hike its key interest rate by three-quarters of a percentage point on Wednesday as inflation rages on globally.
In Canada, inflation hit a 39-year-high of 7.7 per cent in May 鈥� well above the two per cent target rate central banks typically aim for.
The Bank of Canada raised its key interest rate by half a percentage point on June 1, bringing it to 1.5 per cent. Since then, it has signalled a willingness to move in a more aggressive direction.
鈥淲e may need to take more interest rate steps to get inflation back to target. Or we may need to move more quickly, we may need to take a larger step,鈥� said Governor Tiff Macklem at a news conference on June 9.
Most economists are now forecasting a rate hike of three-quarters of a percentage point, following the lead of the U.S. Federal Reserve, which hiked its key rate by that amount last month.
鈥淲ith the economy essentially at full employment, wages starting to stir meaningfully, and headline inflation poised to test eight per cent in this month鈥檚 consumer price index report, the Bank of Canada鈥檚 task is clear at next week鈥檚 decision,鈥� wrote BMO chief economist Douglas Porter in a weekly report on Friday.
The C.D. Howe Institute Monetary Policy Council, a group of economists who provide assessment of the Bank of Canada鈥檚 monetary policy, has also called on the bank to raise its key rate by three-quarters of a percentage point.
But high inflation is far from a solely Canadian phenomenon. Inflation in the United States hit a record-high of 8.6 per cent in May, while it came in at 9.1 per cent in the United Kingdom, the highest rate among G7 countries.
The Bank of Canada has identified both domestic and international factors leading to soaring inflation. Domestically, the bank says there鈥檚 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 bring down inflation driven by domestic factors, but when it comes to global factors such as oil prices, the bank is in a tougher spot.
鈥淥ne of the issues that we鈥檙e having when we discuss central banks is if global inflation is going to stay elevated, if they鈥檝e got a mandate to get inflation back to below three to two per cent and the international inflation isn鈥檛 going to cooperate, do they have to generate significant downturns in domestic economic activity?鈥�
Laval University economics professor Stephen Gordon said the primary reasoning behind a larger rate hike would be to rein inflation expectations.
鈥淚f the bank goes more than 50 basis points, I think the reasoning is they want to 鈥� ensure expectations don鈥檛 get too wild,鈥� said Gordon.
READ ALSO:
The Bank of Canada鈥檚 most recent business outlook survey showed Canadians believe inflation will remain higher than previously expected 鈥� and for a while. Canadians expect inflation to be at four per cent five years from now, the survey found.
Economists become concerned when people and businesses start anticipating high inflation, as expectations impact future pricing of goods and services as well as pay negotiations.
However, a recent report from the Canadian Centre for Policy Alternatives warned rapidly increasing interest rates will likely send the Canadian economy into a recession and could cause significant 鈥渃ollateral damage,鈥� including 850,000 job losses.
But Gordon said a rate hike higher than half a percentage point is warranted, adding that fears of a recession are premature.
鈥淚 don鈥檛 think we鈥檙e anywhere near that risk yet, because the policy rate is still low and the economy is running really well,鈥� Gordon said.
On Friday, Statistics Canada said the unemployment rate in June fell to a record low of 4.9 per cent, pointing to a strong labour market.
As the bank attempts to rein in inflation, it鈥檚 hoping for what鈥檚 referred to as a 鈥渟oft landing,鈥� where inflation is brought under control without triggering a recession.
Both Gordon and Watt said that while the bank wouldn鈥檛 want to drive the economy into a recession, that might be the cost to bear to bring inflation down.
鈥淚 don鈥檛 think that it would be anything that they would eagerly do, but if getting inflation back does end up having to require a recession, I think that they would be prepared to do that at the present time,鈥� Watt said.
Nojoud Al Mallees, The Canadian Press
Like us on and follow us on .
