11 May
The goal of the BoC is to ensure that they can control the high inflation in the country, and this is currently their top priority. As such, the bank is prepared to raise interest rates in a forceful manner if that is what is required to control the high level of inflation in the country. The governor of BoC, Tiff Macklem said in his speech on Wednesday, “The economy needs higher interest rates and can handle them. With demand starting to run ahead of the economy’s capacity, we need higher rates to bring the economy into balance and cool domestic inflation.”
Macklem revealed that the current level of inflation is 6.7%, which is a three-decade high for the country and is well out of BoC expected limit of 1% to 3%. Furthermore, this level of inflation is expected to continue through the remainder of the year.
“We are committed to using our policy interest rate to return inflation to target and will do so forcefully if needed,” he added. “How high rates go will depend on how the economy responds and how the outlook for inflation evolves.”. However, it is essential that Canadians prepare themselves because interest rates will continue to rise in order to control inflation and return to a more normal setting.
Bank considering a 50-bps rate hike in June
Macklem commented that the Bank is considering increasing the interest rate by 50-bps during their next meeting in June. Macklem highlighted this before the Senate committee as well as at the parliamentary hearing. “We’ve signalled very clearly Canadians should expect further increases,” he said to lawmakers on Monday. “Looking ahead to our next decisions, I expect we will be considering taking another 50-basis-point step.”
Although this is the first time Macklem has revealed the size of the next rate hike and the movement of future interest rates, the mortgage industry is already prepared and have priced themselves according to 50-bps rate hike on June 1. As a result, this would lead to the overnight target rate to 1.5%, however, the bond market is pricing in a lower probability of a 75-bps rate hike, though it is possible.
An interesting factor to note is that Derek Holt, who is an economist at Scotiabank, already hinted a 50-bps rate hike in his last research note. He said, “The fact that inflation is running amok should drive a minimum 50-bps hike that we forecast at the next meeting in June. There is even a solid case for the BoC to hike by 75-100 bps in one shot.”
