The Bank of Canada is expected to announce its second interest rate hike of the year at Wednesday’s policy meeting, with economists predicting it will be the largest in two decades – half a percentage point – in response to rising inflation rates.
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 a broad consensus among economists that the Bank of Canada will raise its policy interest rate by half a percentage point, even though the bank usually moves in increments of a quarter of a percentage point. This would be the central bank’s first oversized hike since May, 2000.
When was the last interest rate hike? Will there be more?
The bank raised its policy interest rate to 0.5 per cent from 0.25 per cent in early March – the first hike since 2018 and the start of what is expected to be a succession of increases that could bring borrowing costs back to prepandemic levels some time next year.Bank of Canada overnight lending rateAt month’s end0246%200120052009201320172021Nov. 30, 20064.25%THE GLOBE AND MAIL, SOURCE: BLOOMBERGSHARE×
Borrowing costs are still well below historic levels, so economists and investors expect the bank to move quickly. Financial instruments that track market expectations about rate hikes suggest the bank will raise its policy rate at each of its six remaining decision dates in 2022: April 13, June 1, July 13, Sept. 7, Oct. 26 and Dec. 7. That would move the policy rate above its prepandemic level of 1.75 per cent.
Bank of Canada Governor Tiff Macklem has said higher borrowing costs are needed to prevent inflation expectations from becoming unmoored and to ensure that demand in the economy does not outstrip supply, further pushing up consumer prices.
“For households and businesses that are already feeling the pinch of inflation, the higher cost of borrowing can be doubly painful. But tighter monetary policy is necessary to lower the parts of inflation that are driven by domestic demand,” he said early last month.
Why are bankers predicting an oversized interest rate hike and what is its significance?
Canada’s top central bankers have hinted in speeches over the past month that an oversized hike is on the table. The Bank of Canada’s Business Outlook Survey, released on April 4, adds to the argument that the central bank may need to make such a move.
According to a Reuters poll, a majority of economists are also calling for a half-point hike this month, including the five biggest banks in Canada, as well as National Bank. The Big Five also expect another half-point rate increase at the June meeting, even though the wider poll expects the pace to slow to quarter-point hikes each month, taking the policy interest rate to 2 per cent by the end of 2022.
Bank of Canada deputy governor Sharon Kozicki has said the central bank is “prepared to act forcefully” to bring high inflation under control, meaning rate increases 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 is in response to the 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 rebounded from the pandemic-induced recession and no longer needs emergency monetary policy support.
Interest rate increases theoretically bring down both inflation and people’s expectations for future inflation.
“The lesson from history is that if inflation expectations become unmoored, it becomes much more costly to get inflation back to target,” Mr. Macklem said in early March, which would mean the bank would have to raise interest rates higher and faster.
What’s the global landscape when it comes to interest rate hikes in other countries?
The Bank of Canada is not alone in signalling a more aggressive path for higher rates. Other central banks, most notably the U.S. Federal Reserve, have pivoted in recent months to forecasting a rapid rise in borrowing costs.
On March 16, the Fed raised its policy rate for the first time since cutting it at the outset of the pandemic. Fed officials expect to increase the rate at least six more times this year, according to projections published in mid-March.
Fed Chair Jerome Powell said the central bank needs to move “expeditiously” toward tighter monetary policy. It is expected to deliver two back-to-back 0.5-percentage-point interest rate hikes in May and June to tackle runaway inflation, according to economists polled by Reuters who also say the probability of a recession next year is 40 per cent. The U.S. Labor Department said Tuesday that U.S. inflation jumped 8.5 per cent in March from 12 months earlier, the sharpest increase since December 1981.
Meanwhile, the Bank of England raised interest rates for the third time in a row on March 17 in a bid to stop fast-rising inflation. The bank’s Monetary Policy Committee voted to raise the interest rate to 0.75 per cent from 0.5 per cent, taking the benchmark for borrowing costs back to its pre-pandemic level.