Are Further Oversized Hikes on the Way?

In order to crack down inflation, a prominent economist has highlighted that there will be a further 50-basis point increase to Bank of Canada’s benchmark rate in their next two policy rate announcements. Doug Porter, chief economist at BMO Capital Markets, revealed that the central bank is aiming to take an “aggressive” approach to rate hikes in their next meeting after the raising of the trendsetting rate in its March and April announcements.

“We are building in 50-basis-point increases in each of the next two meeting. Effectively, we see the Bank of Canada getting back to 2% as quickly as they reasonably can – [and] they might be slightly over aggressive.” He spoke. There is a possibility that there would be a 25-basis point increase this year, however, regardless of the size of rate hike, the Bank of Canada will take the interest rate up to 2% as quickly as they can and then slightly nudge it above 2% before the end of this year.

The bank’s most recent rate announcement was a “stern” one as Canada’s inflation crisis was marked by strong language and the urgent requirement for a further rate increase. “There was definitely a feeling of concern by the Bank of Canada – but appropriately so, and given the circumstance, [it’s] not that surprising that the Bank would both sound a bit concerned and commit to raising interest rates further,” said Porter.

The Bank highlighted that their vision for inflation had to be revised significantly from earlier expectations and they indicated in the Consumer Price Index that which is at a currently three-decade-high, was only likely to return to its 2% target by 2024. When inquired whether the Bank had miscalculated inflation rates as they had kept the rates so low during the pandemic, economists highlighted that although missteps were made, worst-case scenarios were avoided.

Moreover, analysts have theorised that one of the reasons why rates were low during the pandemic was that policymakers were planning to keep the policy loose because the situation could have been worse if they had tightened prematurely, and the economy had not held up as well as it did. Having the rates low was the better option for policymakers than raising rates and keeping unemployment at an elevated level for a lengthy period.