Bank of Canada’s second 50-bps hike seen locked in, but what comes next?
2022.06.01 08:21
A sign is pictured outside the Bank of Canada building in Ottawa, Ontario, Canada, May 23, 2017. REUTERS/Chris Wattie/File Photo
By Julie Gordon
OTTAWA (Reuters) – The Bank of Canada will almost certainly go ahead with its second consecutive half-point interest rate hike on Wednesday, as it scrambles to tame runaway inflation before price increases become self-fulfilling. The big mystery is what happens next.
All 30 economists surveyed by Reuters expect the central bank will hike its policy rate to 1.5% from 1.0% in a decision at 10 a.m. ET (1400 GMT). That will follow April’s 50-basis-point move, the first such increase in more than two decades.
After teasing an even bigger lift, Governor Tiff Macklem made clear in recent weeks that discussions ahead of Wednesday’s decision would center on another 50-basis-point increase.
Market watchers will be focused on the accompanying statement for any hints what is yet to come, including whether an unprecedented third consecutive half-percentage point increase is in the cards.
“I think the focus will be on the pace of future rate hikes, because there is some question about what happens next,” said Royce Mendes, head of macro strategy at Desjardins Group.
Money markets have already fully priced in a third straight 50-basis-point increase in July, and investors are looking for clues whether the cycle will peak with rates at or above 3%, a level not seen since 2008.
Canada’s inflation rate hit 6.8% in April, with food prices surging at rates not seen since the early 1980s. If left unchecked, the Bank of Canada risks a price spiral, making getting back to the 2% inflation target even harder.
Officials have made it clear they want to get the policy rate back in the neutral range — 2% to 3% — but it won’t be smooth sailing. The Bank was forced to pause at 1.75% in the last cycle as higher rates wobbled the housing market and consumer spending.
But, this time around, other areas of the economy may have to take a backseat to inflation, at least until some of the heat comes off, said analysts.
“The game has completely changed this year as a result of such a high level of inflation. The Bank really has to put the blinders on and hike rates,” said Doug Porter, chief economist at BMO Economics.
First-quarter economic growth disappointed on Tuesday, though it was almost bang-on the central bank’s forecast. A preliminary estimate for April showed slowing home sales, caused by rising rates, were starting to weigh on growth. But domestic demand was buoyant and household spending looked robust headed into the second quarter.
