A Scotiabank economist explains why the Bank of Canada has to raise its overnight rate again

Last week Jean-François Perrault, senior vice president and chief economist at Scotiabank, called for another rate increase by the central bank. In his opinion, such a move will help the Bank of Canada strengthen its competence for Canadians.

According to him, although increasing the key lending rate by 0.25% next month could cause certain risks to the national economy, it’s still important for the BoC to prove to Canadians that it’s determined to keep fighting the inflation hike.

“The risk of not doing enough means the inflation may not fall as fast as we want. As a result, we may need to raise rates even more in order to restrain inflation,” – he noted.

“A one-quarter rate hike will not make a huge difference for anyone’s pockets, but it will help solidify the central bank’s message.”

As you know, the BoC has kept its overnight rate at 4.25% since March and the next meeting is scheduled for June 7.

The central bank’s last available economic data was April’s stronger-than-expected consumer price index, which showed that the annual inflation reached 4.4%, Statistics Canada says.

Perrault is the second economist to speak about the necessity of another rate increase. CitiGroup’s Veronica Clark was the first one.

Aside from Canada’s heightened living costs, Perrault named the extremely strong real estate market and high employment as two other major data points that don’t help with the affordability issue.

Although the numbers are strong, another expert says the Bank doesn’t have enough information to guarantee a rate increase in June.

“I believe the next meeting will still show a wait-and-see attitude, reviewing the changes in fundamentals of the Canadian economy, before making another rate decision,” – Karl Schamotta from Corpay says.

In his opinion, if the data keeps pointing to growth risks, there may be a rate hike in the nearest future.

“If May shows stubbornly high inflation and strong employment growth, that might force the central bank to raise the rates, probably in July,” – he explained.


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