Good morning,
An unexpected resurgence in inflation has markets eyeing interest rate hikes again, with at least one economist arguing there is a case to be made for the Bank of Canada to act as soon as its next meeting on June 7.
Scotiabank economist Derek Holt said the central bank is in a “race against the clock” with high prices. “If the BoC doesn’t adopt the crush it, killer mentality, then it may never succeed in getting inflation down to two per cent,” he said in a note to clients on May 17.
Statistics Canada reported on May 16 that the April consumer price index (CPI) accelerated 4.4 per cent from a year ago, a faster pace than the 4.1 per cent expected by economists.
The Bank of Canada has raised its benchmark rate to 4.5 per cent from 0.5 per cent over the past year in a bid to bring inflation that surged to a four-decade high back to earth.
Holt, known on Bay Street as a vocal critic of the central bank’s decision to not move rates sooner last year, said there are a few pressing arguments to be made in favour of Bank of Canada governor Tiff Macklem raising rates at the June 7 meeting. Among them is the bogeyman of inflation expectations.
“There is the debate over crushing it now versus hanging out higher for longer,” Holt said in the note. “The way I settle that is by portraying the challenge of getting inflation under control as a race against the clock.”
The longer higher inflation continues, the more it will erode consumer and business confidence in the Bank of Canada’s ability to achieve its two-per-cent target, he said.
Holt believes higher inflation “has already gone on too long,” and that consumers and businesses have possibly lost faith in the two-per-cent mantra, at least in the near term. As evidence, he pointed to the bank’s most recent consumer and business surveys. They showed that consumers expect inflation of about six per cent over the next year, cooling to just above four per cent two years from now. Businesses expect inflation to hover just below four per cent over the next two years.
The bank’s recent Monetary Policy Report (MPR) said that “most respondents to business and consumer surveys still think that CPI inflation will be higher than the bank’s inflation forecast over the next two years.” Bank forecasts are for inflation of 3.5 per cent in 2023 and 2.3 per cent in 2024.
Holt also cited pay increases negotiated in recent collective bargaining agreements as evidence that people expect higher inflation for longer. “No one really believes in two per cent for years to come,” he said. Just weeks ago, Ottawa and the Public Service Alliance of Canada agreed to a contract, following a country-wide strike, that included a wage increase of 12.6 per cent over a four-year period, retroactive to June 2021.
Macklem himself hasn’t ruled out further rate hikes. In the central bank’s April rate decision, where it held at 4.5 per cent, it opened the door to future increases, saying “it remains prepared to raise the policy rate further if needed to return inflation to the two-per-cent target.” Macklem repeated that message in a speech to the Toronto Board of Trade on May 4.
