Bank of Canada set for another 50bp hike | ING Economics

Another 50bp from the BoC

The Bank of Canada looks set to raise the policy rate a further 50bp on Wednesday as officials become increasingly anxious about high inflation spiralling out of control. Annual CPI is already up at 6.8%, the highest rate since January 1991, while the labour market has more than fully recovered all of the jobs lost during the pandemic. With job vacancies now exceeding one million, there is clear concern that wage rates will rise even more rapidly, with the Canadian Federation for Independent Business reporting a median expectation for pay rises of 3.5% over the next 12 months. Some 35% of respondents thought it would exceed 5% in an economy that is expected to grow 4% this year, all of which runs the risk of inflation staying higher for longer.

Canada jobs market outperforms that of the US - employment levels versus pre-pandemic peak

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75bp can't be ruled out

In response, the Bank of Canada's commentary is becoming more robust. Deputy Governor Toni Gravelle warned this week that inflation has been “higher and more tenacious” than expected and the Bank is “committed” to bringing it down to target. Moreover, “our policy rate, at 1%, is too stimulative” and the bank is “prepared to be as forceful as needed” to get inflation to 2% and that involves getting to the neutral range for rates at 2-3% “quickly”.

This followed comments from Senior Deputy Governor Carolyn Rogers who also pointed to the need to get interest rates higher quickly “with the Canadian economy starting to overheat”. With BoC Governor Tiff Macklem having told us back in April that the Bank will no doubt be “considering taking another 50bp step”, it is unsurprising that the market is fully backing such a move on 1 June, given the latest raft of data. We would argue that you cannot dismiss the possibility of a 75bp hike given the current macro environment.