BoC expected to raise rates again this week, vying to quash inflation faster

The Bank of Canada is expected to raise interest rates again this week as forecasters say the economy has not softened enough for the central bank to back off.

The interest rate announcement is scheduled for Wednesday, just over one month after the central bank hiked its key rate by a quarter of a percentage point, bringing it to 4.75%.

The June decision brought an end to the Bank of Canada’s pause on rate hikes after a string of hot economic data prompted concerns that rates were not high enough to bring inflation back to its 2% target.

Deloitte’s chief economist, Dawn Desjardins, said there have been some recent signs that the economy is taking a turn, with the latest job report for June showing the unemployment rate rising and wage growth slowing.

But the overall picture suggests inflation is still sticky, wage growth is high and the economy continues to churn, she said.

“I do think that we are seeing things shift. Are they shifting fast enough for the Bank of Canada? Perhaps not,” Desjardins said.

The Bank of Canada has stayed mum on what it plans to do in July, offering little forward guidance to financial markets. Instead, it has said the governing council would make its decision based on incoming economic data.

Among the indicators it tracks, the Bank of Canada has been monitoring the labour market closely. The central bank has warned that the pace of annual wage growth, which has been hovering in the 4% to 5% range, is not compatible with its 2% inflation target without productivity gains.

Economists reacting to the latest jobs report for June said the details paint a mixed picture. The economy added 60,000 jobs last month, suggesting employers’ hiring appetite persists. Meanwhile, the unemployment rate climbed higher to 5.4% as more people looked for work and the country’s population continued to grow.

Wage growth also slowed down significantly to 4.2% last month. That’s compared with a year-over-year gain of 5.1% in May.

The central bank’s recent business outlook survey also said that for the first time since the beginning of the pandemic, businesses on balance expected slower wage growth over the next year.

But with the unemployment rate still below pre-pandemic levels, Desjardins’ senior director of Canadian economics suggests the labour market is still tight.

“We are still seeing a lot of underlying strength in the in the Canadian labour market, and much more so than you would expect with the overnight rate approaching 5%,” said Randall Bartlett from Desjardins.

On the inflation front, price growth has eased considerably since last year. Inflation in May slowed to 3.4%, down from its peak of 8.1% last summer. But much of the deceleration in inflation is attributed to lower energy prices, while other prices have continued to rise.

Core inflation, which strips out volatility in the measure, actually accelerated in May.

The Bank of Canada and private-sector economists say the challenge ahead will be getting inflation back to the 2% target.

Economists were widely anticipating a recession to hit as early as late 2022. Instead, the economy has continued to expand, despite interest rates being at their highest levels in decades.

That’s why Bartlett said the Bank of Canada’s decision to remain hawkish is justified.

“I think the bank is really laying the groundwork to sustainably start bringing inflation back towards 2%,” he said.

Statistics Canada’s preliminary estimate suggests the economy expanded again in May, after remaining flat in April.

Bartlett said his firm’s estimate for the second quarter shows growth at twice the pace the Bank of Canada forecasted in April.

That’s why the economist is expecting the central bank to not only raise rates, but to signal that even more rate hikes may come if the economy doesn’t slow down sufficiently.

“We think there’s enough strength in the economy that the banks probably going to be very hawkish in his statement as well, and signal that the door is open … to further hikes potentially in September.”