The Bank of Canada is expected to announce its second interest rate hike of the year at Wednesday’s policy meeting, with economists forecasting it to be the largest in two decades (half a percentage point) in response to rising interest rates. inflation.
How many more rate hikes are expected this year? What will they mean for inflation? Here’s everything we know so far ahead of the announcement.
Is the Bank of Canada expected to announce another rate hike at its next policy meeting?
There is broad consensus among economists that the Bank of Canada will raise its policy interest rate by half a percentage point, although the bank typically moves in quarter-percentage-point increments. This would be the central bank’s first oversized hike since May 2000.
When was the last interest rate hike? There will be more?
The bank raised its official interest rate to 0.5 percent from 0.25% in early March, the first increase since 2018 and the start of what is expected to be a succession of increases that could see borrowing costs return to pre-pandemic levels at some point in the coming year. next year.
Borrowing costs are still well below historical levels, so economists and investors expect the bank to move quickly. Financial instruments that track market expectations of rate hikes suggest that the bank will increase its policy rate in each of the your six remaining decision dates in 2022: April 13, June 1, July 13, September 7, October 26 and December 7. That would move the policy rate above its pre-pandemic level of 1.75 percent.
Bank of Canada Governor Tiff Macklem has said higher borrowing costs are needed to prevent inflation expectations from running wild and to ensure that demand in the economy does not outstrip supply, further driving up consumer prices. .
“For households and businesses already feeling the effects of inflation, the higher cost of borrowing can be doubly painful. But tighter monetary policy is needed to reduce the parts of inflation that are driven by domestic demand,” he said early last month.
Why are bankers predicting a large interest rate hike and what does it mean?
Canada’s top central bankers have hinted in speeches over the past month that a major hike is on the table. The Bank of Canada Business Outlook Surveypublished on April 4, adds to the argument that the central bank may need to make such a move.
According to a Reuters poll, most economists are also calling for a half-point increase this month, including Canada’s five largest banks, as well as the National Bank. The Big Five also expect another half-point rate hike at the June meeting, though the broader survey expects the pace to slow to quarter-point increases each month, taking the policy rate to 2 percent. by the end of 2022.
Bank of Canada Deputy Governor Sharon Kozicki has said the central bank is “prepared to act with force” to control high inflation, which means rate hikes could be bigger, and come sooner.
What does the rate hike mean for inflation?
The Bank of Canada’s decision to start tightening monetary policy responds to highest inflation in decades, which has eroded the purchasing power of the Canadian dollar and challenged the central bank’s credibility as an inflation fighter. It has also become clear in recent months that the Canadian economy has largely recovered from the pandemic-induced recession and no longer needs emergency monetary policy support.
Interest rate increases theoretically reduce both inflation and people’s expectations of future inflation.
Inflation hit a three-decade high of 5.7 percent in February, almost three times higher than the bank’s 2 percent inflation target. Rising prices for oil and agricultural commodities, which have spiked as a result of the Russian invasion of Ukraine, are putting additional pressure on consumers.
“The lesson of history is that if inflation expectations are unleashed, it becomes much more costly to get inflation back on target.” Mr. Macklem said in early Marchwhich would mean that the bank would have to raise interest rates higher and faster.
What is the world picture regarding interest rate hikes in other countries?
The Bank of Canada is not alone in pointing to a more aggressive path to higher rates. Other central banks, notably the US Federal Reserve, have pivoted in recent months to forecast a rapid rise in borrowing costs.
On March 16, the Fed raised its policy rate for the first time since it was cut off at the start of the pandemic. Fed officials expect to raise the rate at least six times this year, according to projections released in mid-March.
Fed Chairman Jerome Powell said the central bank needed to move “quickly” toward tighter monetary policy. It is expected to deliver two consecutive 0.5 percentage point interest rate hikes in May and June to tackle runaway inflation, according to economists polled by Reuters who also say that the probability of a recession next year is 40 percent. The US Department of Labor said Tuesday that US inflation jumped 8.5% in March from 12 months earlier, the largest increase since December 1981.
Meanwhile, the Bank of England raised interest rates for the third consecutive time on March 17 in a bid to stem rapidly rising inflation. The bank’s Monetary Policy Committee voted to raise the interest rate from 0.5% to 0.75%, bringing the benchmark for borrowing costs back to its pre-pandemic level.
Compiled by Abigale Subdhan.
With reporting by Mark Rendell and Reuters.
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