Economists believe the Bank of Canada may postpone rate increases even in spite of inflation risks
According to certain Bay Street economists, the central bank will probably wait for a longer period of time before raising its key lending rate even despite the fact that inflation exceeds the BoC’s target range and it can have a potential impact on household spending.
“In case you believe that the recent inflation growth is temporary, then the Bank of Canada likely can wait a bit longer,” – Sal Guatieri, senior economist and director at BMO Capital Markets, noted.
“The unemployment rate remains 1% higher than the decade lows we’ve seen before the pandemic. Wage growth is still restrained, with average hourly earnings going up by 2% annually. That’s why based in such data, they probably can afford to wait.”
Capital Economics Senior Canada Economist Stephen Brown shares this opinion. He says Canada shows only the first signs of wage growth, and much of the inflationary pressures are caused by domestic and global supply chain constraints. Brown believes the central bank is not as concerned about it, because it will probably not lead to permanent price gains.
Markets predict no rate changes from the BoC on Wednesday, even in spite of growing inflation.
While the Governor Tiff Macklem noted the Bank may start raising rates in April, both Guatieri and Brown don’t expect it until July.
The central bank focuses on the question of how long inflation will remain that high.
“Most analysts, including ourselves, expect the inflation to moderate or start slowing down by the spring of 2022. Then it could get close to the midpoint of the Bank’s target range by the end of next year,” – Guatieri said, admitting that this forecast depends significantly on the course of the pandemic and whether the Omicron variant affects supply chain issues. He says in case the forecast comes true, the BoC will have more time to postpone the beginning of its tightening cycle, as inflation will be moving in the right direction.