RBC demands rapid action from the central bank concerning interest rates

During a recent interview, RBC CEO David McKay said the Bank of Canada has to take “rapid action” with several interest rate hikes in order to restrain inflation.

In McKay’s opinion, the current acceleration of inflation isn’t transitory. He points to certain signs of a wage-price cycle that has already led to higher costs permanently.

“We’ve never really reduced wages because inflation was temporary,” – McKay noted. “We are dealing with permanent, sustained inflation, and it should be addressed through monetary policy. We need rapid action this spring in a form of multiple rate increases.”

McKay’s statement shows how inflation (just like labor shortages, growing wages and housing affordability) has become the main issue for the nation’s executives. Canada’s inflation rate has remained close to 5% recently, marking the first time we’ve seen such numbers since 2003.

While markets express different opinions, some are predicting at least five rate hikes by the BoC in 2022, starting from the Bank’s first rate meeting this year on January 26. The Bank of Canada officials have noted they would have to start raising rates early this year in order to slow the prices growth after keeping the key lending rate at a historic low of 0.25% since March 2020.

Commercial banks offer their best customers over 2% above that policy rate (Prime rate for the majority of banks is 2.45%).

Such a call for higher rates is even more significant in terms of households’ debt levels, as they will be affected most by the higher borrowing costs. McKay highlighted this issue during the interview as well.

At the same time, McKay warned that we shouldn’t blame immigration for Canada’s growing real estate prices, as the economy needs new sources of labor.

“It’s better to find a way to accommodate” the population growth, he said. “If we fail to do that through the market supply, we’ll see an opposite trend: we won’t attract immigrants because the cost of living and the quality of life isn’t there. If people start preferring other markets for that reason, it will be the worst scenario.”


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