Towards a 75-point increase in the Bank of Canada's key rate

Towards a 75-point increase in the Bank of Canada’s key rate

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

Under the circumstances, the Bank of Canada is more than likely to raise its benchmark rate by 75 basis points on July 13, say economists at RBC and BMO.

Thus, the overnight interest rate target would go from 1.50 to 2.25%, while the official bank rate, currently at 1.75%, would stand at 2.50%.

calling everyone

Would a 75-point increase in the Bank of Canada’s key rate upset your budget? Have you started to feel the effect of the previous climbs?

The Bank of Canada published this Monday morning the most recent installments of theCanadian Consumer Expectations Survey and of theBusiness Outlook Survey.

“Near-term inflation expectations have reached all-time highs, with prices a year from now expected to hit +6.8% y/y (vs. +5.1% in Q1), while gains are expected in two years to hit +5.0% YoY (vs. +4.6%),” BMO economist Priscilla Thiagamoorthy wrote in a note to clients.

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

“This last figure is particularly worrying, comments his colleague Shelly Kaushik, because it indicates that long-term expectations could move away from the Bank’s goal; That said, it remains below the pre-pandemic peak of 4.3% in the second quarter of 2018.”

The amount of suivre de près l’évolution des anticipations inflationistes au pays, comme le soulignait le Fonds monétaire international dans a texte de 2018 : « Dans bien des pays, le principal moteur de l’inflation repose sur l’évolution des anticipations inflationistes à Long-term. The logic is that if many people believe that goods and services will cost more next year, this year they will increase their purchases to save, which will have the effect of increasing the demand for that good and, consequently, materializing the price increase apprehended more sooner than later.

Of course, other factors contribute to inflation, acknowledges the IMF, “excess productive capacity and external pressure on prices.”

commercial pressures

On the business side, short-term inflation expectations have also increased. According to them, inflation will remain high for longer than expected in the latest survey, “despite the Bank’s shift to a more aggressive tightening stance in the spring,” notes Kaushik.

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

“We think today’s survey only increases the probability that the central bank will follow the US Fed 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 strengthens our expectations for a 75 basis point increase at next week’s monetary policy meeting,” BMO added.

The central bank has an inflation target for the country that ranges between 1% and 3% with a median rate of 2%. The plupart des économistes des grandes banques canadiennes predicts a return to inflation at 2% in 2024. Last week, Deloitte’s economist Mario Iacobacci brisait the consensus on prévoyant plutôt a return to normal in 2025 au plus early.

“Going back to the target, the companies cited a number of conditions that would need to be met, including higher interest rates, improved supply chains, lower oil prices and an end to the conflict in Ukraine,” says BMO.

Salary increases on the horizon

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

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