A half per cent rate increase in Canada is almost guaranteed in June

Inflation still exceeds  the central bank’s recent forecast, which “virtually guarantees” another half per cent rate increase on June 1, CIBC economist Andrew Grantham says.

“It could be followed by another large hike to push the overnight rate to the bottom end of its neutral range (2-3%) very fast,” – he adds. “Nevertheless, after that, certain signs of slowing in the domestic economy and inflationary pressures should slow down the pace of increases. In our opinion, the Bank of Canada will not raise the rate above 2.5% in order to bring inflation back to its 2% target next year.”

Other economists share this idea, noting that the central bank’s monetary policy is still “too accommodating” for the current economic conditions.

“Amid the tight labour market with the unemployment rate at a record low level, workers can ask for compensation, and this could lead to relatively high inflation in services,” – said economists from the National Bank of Canada. “That’s why the BoC needs to follow its fast-paced process of normalizing rates, which are still far too accommodating for the economic situation.”

Derek Holt from Scotiabank says the BoC will use all the tools to restrain inflation.

“As growth and inflation exceed forecasts, the Bank may feel even more concerned about future rate increases,” – Holt wrote. “Governor Macklem has admitted a 0.50% rate increase would be discussed on June 1, and we expect this move. He also said he would like to get back to neutral relatively quickly. We expect three 0.50% hikes in June, July and September followed by 0.25% gains in the final two meetings of 2022.”

As a result, today’s 1% overnight rate would reach the top end of the BoC’s neutral range of 3%.

Traders agree with this forecast, as Overnight Index Swap shows almost 100% guarantee of 0.50% increases both in June and July, and a 3% rate by the end of the year.

“In case the central bank can’t reach neutral now, it will be a strong litmus test for whether other global central banks will be able to do it,” – Holt concluded.


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