Bank of Canada raised 75 basis points 'probability', but 50 basis points compressed

Bank of Canada raised 75 basis points ‘probability’, but 50 basis points compressed

The Bank of Canada is widely expected to raise its overnight interest rate by 50 basis points on June 1. (Reuters/Blair Gable)

The Bank of Canada is expected to raise its overnight interest rate by 50 basis points on Wednesday as it tries to battle high inflation to its 2 per cent target.

Economists widely expect the central bank to raise the benchmark interest rate Wednesday night to 1.5 percent, marking a second straight increase of 50 basis points. The initial 50 basis point rise in April was the largest single rate hike in 22 years. When a bank raises the interest rate overnight, it’s usually a quarter of a percent each time.

But high inflation forced the Bank of Canada to embark on a tighter path of monetary policy.

A Reuters poll of 30 economists found that everyone expects the Bank of Canada to raise its overnight interest rate by 50 basis points. Just a month ago, economists had expected a rise of 25 basis points in June.

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

“Since the April meeting, the bank has maintained a consistent tone, leaving no reason to believe it will deviate from the 50 basis point pace. Inflation remains well above target and is likely to accelerate further in the coming months,” Reitzes wrote in a note.

“It is clear that the Bank of Canada has been greatly reducing the momentum of inflation, reinforcing its desire to at least return interest rates to neutral – which the Bank believes to be in the 2 to 3 per cent range – as soon as possible.”

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

Andrew Grantham, chief economist at CIBC Capital Markets, echoes Reitzes’ expectations of another “significant move” in July, which would bring the rate below the bank’s neutral range of 2 to 3 per cent.

“However, beyond that, signs of a slowdown in the domestic economy and domestic inflationary pressures should slow the pace of rate hikes, and we remain suspicious that the Bank will not have to take rates above 2.5 percent for growth slow enough to lower inflation. to its 2 percent target in 2023,” Grantham wrote in a note.

While markets have priced in a 50 basis point rise, some economists have not written off the possibility that the central bank will be more aggressive than expected and an overnight rate hike of 75 basis points on Wednesday.

“With Bank of Canada Governor Teff McClem telling us in April that the bank is undoubtedly “considering taking another 50 basis point move,” it is no surprise that the market would fully support such a move on June 1,” James Knightley and strategist Francesco Bisol wrote in note.

“We might claim that you cannot rule out the possibility of a 75 basis point increase, given the current macro environment.”

High prices are already starting to cool the Canadian real estate market. Prices fell 6.3 percent in April from the previous month while sales were down 12.6 percent, according to data from the Canadian Real Estate Association.

Files from Reuters

Elijah Sikerska is a Senior Reporter at Yahoo Finance Canada. Follow her on Twitter Tweet embed.

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2022-05-31 11:00:15

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