By Max Sato
(MaceNews) – The Bank of Canada is widely expected to raise its policy interest rate — the target for overnight lending rates — by 75 basis points to 3.25% on Wednesday as part of its front-loading credit tightening drive to bring down decades-high inflation above 7% to its 2% target.
The move would follow a rate hike by an unusually large 100 basis points in July for the biggest rate increase since 1998. At the time, Governor Tiff Macklem said the aggressive tightening reflected “very unusual economic circumstances” of inflation nearly at 8% and stressed that the key rate must rise further to around the top end of the 2% to 3% neutral range.
The bank has now raised the rate for the fourth consecutive time and BOC policymakers have said their job is not done yet, thus leading financial market participants to price in a 75-basis point hike this week and possibly follow up with a 25-basis point rise in the bank’s next policy decision on Oct. 26. The last policy meeting scheduled for the year is on Dec. 7.
The focus is on whether the bank will call for further tightening to cool off pent-up demand and the housing market in its statement to be issued at 10 a.m. EDT (1400 GMT) Wednesday.
In its last statement issued on July 13, the bank said, “The Governing Council continues to judge that interest rates will need to rise further, and the pace of increases will be guided by the bank’s ongoing assessment of the economy and inflation.”
“If they do 75 (or less likely, but still possible 100), they could change that statement to say ‘interest rates might need to rise further,’ making it seem like a judgement they will make later,” Avery Shenfeld, chief economist at CIBC Capital Markets said.
Going forward, Shenfeld expects the BOC to pause in its Oct. 26 policy decision.
Douglas Porter, chief economist at BMO Financial Group, said Governor Macklem has emphasized the need to prevent high inflation from “becoming entrenched” by raising rates quickly.
“But Macklem also said they don’t want to crush demand, and that they realize higher rates are causing some pain, and I suspect that they want to be careful about not over-doing rate hikes,” Porter said. “At this point we are looking for a 25 bp hike in October, and will officially decide on the next step after we hear from the BOC on Wednesday.”
“By front-loading interest rate increases now, we are trying to avoid the need for even higher interest rates down the road,” the governor told a news conference in July, adding that “the path to soft-landing is narrow.”
Earlier, the bank conducted a 50-basis point increase in June and April and a 25-basis point rise in March, when it began the current tightening cycle with its first interest rate hike since October 2018 by lifting the key rate to 0.5% from its record low 0.25%.
In June, the bank warned that it was “prepared to act more forcefully if needed to meet its commitment to achieve the 2% inflation target.”
The annual consumer inflation rate in Canada has slowed to 7.6% in July from 8.1% in June due to a smaller year-on-year rise in gasoline prices. Excluding gasoline, the CPI rose 6.6% on year in July, up slightly from a 6.5% gain in June, as upward pressure on prices remained broad-based.
Canada’s gross domestic product grew 0.8% on quarter, or 3.3% at an annualized rate, in the April-June quarter, coming in weaker than expected but still stronger than the U.S. economy, which posted the second straight contraction in the second quarter. The growth in Canada was led by private consumption spurred by pent-up demand for travel and entertainment while rising mortgage rates dampened housing construction. In June, GDP rose 0.1% on the month and the Statistic Canada’s early estimate for July is a slight 0.1% pullback.