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BoC 75 basis point hike a "possibility", but 50 basis points baked in

·3 min read
Bank of Canada Governor Tiff Macklem arrives to a news conference in Ottawa, Ontario, Canada April 13, 2022. REUTERS/Blair Gable
The Bank of Canada is widely expected to hike its overnight rate by 50 basis points on June 1. (REUTERS/Blair Gable)

The Bank of Canada is expected to hike its overnight rate by 50 basis points on Wednesday as it tries to wrestle skyrocketing inflation back to its two per cent target.

Economists widely predict that the central bank will raise its overnight rate on Wednesday to 1.5 per cent, marking its second consecutive 50 basis point hike. The initial 50 basis point hike in April was the biggest single interest rate increase in 22 years. When the bank hikes its overnight rate it is typically by a quarter of a per cent at a time.

But soaring inflation has forced the Bank of Canada to embark on an aggressive path to tighten monetary policy.

A Reuters poll of 30 economists found that all expect the Bank of Canada to raise the overnight rate by 50 basis points. Just a month back, economists forecast a 25-basis-point hike in June.

The price of virtually everything has gone up in recent months, with inflation hitting a three-decade high of 6.8 per cent in April. All eight major components of the Consumer Price Index (CPI) jumped that month, with food and shelter prices accelerating at a faster rate than in March. Canadians paid nearly 10 per cent more for groceries in April, the largest increase since Sept. 1981.

"Since the April meeting, the Bank has maintained a consistent tone, leaving little reason to believe it will deviate from the 50 basis point pace. Inflation remains well above target and will likely accelerate further in the coming months," BMO Capital Markets economist Benjamin Reitzes wrote in a note.

"It’s clear that the Bank of Canada was vastly underestimating inflation momentum, which reinforces its desire to get policy rates at least back to neutral—which the Bank believes to be in the two-to-three per cent range— as soon as possible."

Reitzes says he expects a third 50 basis point hike in July, at which point the central bank will slow the pace of tightening. An additional half-point hike would bring the benchmark rate to 2 per cent, a level not seen since 2008.

CIBC Capital Markets senior economist Andrew Grantham echoes Reitzes' expectation for another "outsized move" in July, which would bring the rate to the bottom of the bank's neutral range of between two and three per cent.

"However, after that, signs of a slowing in the domestic economy and home-grown inflationary pressures should slow down the pace of rate hikes, and we still suspect that the Bank won’t have to take rates above 2.5 per cent in order to slow growth enough to bring inflation down to its 2 per cent target in 2023," Grantham wrote in a note.

While markets have priced in a 50 basis point hike, some economists have not written off the possibility that the central bank may be even more aggressive than anticipated and hike the overnight rate by 75 basis points on Wednesday.

"With Bank of Canada Governor Tiff Macklem having told us back in April that the Bank will no doubt be 'considering taking another 50 basis point step', it is unsurprising that the market is fully backing such a move on 1 June," ING economist James Knightley and strategist Francesco Pesole wrote in a note.

"We would argue that you cannot dismiss the possibility of a 75 basis point hike, given the current macro environment."

Rising rates have already started to cool Canada's red-hot real estate market. Prices fell 6.3 per cent in April from the previous month while sales dropped 12.6 per cent, according to data from the Canada Real Estate Association.

With files from Reuters

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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