The Bank of Canada is expected to raise its interest rate by 0.5% on Wednesday. Here’s what it means for Canadians

A person walks past the Bank of Canada in Ottawa.Spencer Colby/The Globe and Mail

The Bank of Canada is set to announce its second interest rate hike of the year at Wednesday’s policy meeting, with economists predicting it will be the biggest in two decades – half a percentage point – in response to rising inflation rates.

How many more rate hikes are expected this year? What will they mean for inflation? Here’s everything we know so far ahead of the announcement.

Should the Bank of Canada announce another rate hike at its next policy meeting?

There is a broad consensus among economists that the Bank of Canada will raise its key interest rate by half a percentage point, even though the bank usually does so in quarter-percentage-point increments. It would be the first oversized central bank hike since May 2000.

When was the last interest rate hike? Will there be more?

The bank raised its benchmark rate to 0.5% from 0.25% in early March – the first hike since 2018 and the start of what is expected to be a string of increases that could bring borrowing costs back to pre-pandemic levels l ‘next year. .

Borrowing costs are still well below historical levels, so economists and investors expect the bank to act quickly. Financial instruments that track market expectations for rate hikes suggest that the bank will raise its policy rate each month. his six remaining decision dates in 2022: April 13, June 1, July 13, September 7, October 26 and December 7. This would push the policy rate above its pre-pandemic level of 1.75%.

Bank of Canada Governor Tiff Macklem said higher borrowing costs were needed to keep inflation expectations from coming off and to ensure demand in the economy does not exceed the supply, which would further drive up consumer prices.

“For households and businesses already feeling the pinch of inflation, the higher cost of borrowing can be doubly painful. But tighter monetary policy is needed to reduce the parts of inflation that are driven by domestic demand,” he said early last month.

Why are bankers predicting a disproportionate rise in interest rates and how significant is it?

Canada’s top central bankers hinted in speeches last month that an outsized hike was on the table. The Bank of Canada’s Business Outlook Survey, released on April 4, reinforces the argument that the central bank may need to take such action.

According to a Reuters poll, a majority of economists are also calling for a half-point hike this month, including Canada’s five largest banks, as well as National Bank. The Big Five also expect another half-point rate hike at the June meeting, although the broader poll expects the pace to slow to quarter-point hikes. point each month, bringing the key interest rate to 2% by the end of 2022.

Bank of Canada Deputy Governor Sharon Kozicki said the central bank was “ready to act forcefully” to bring high inflation under control, meaning rate hikes could be bigger – and intervene more. early.

What does rising rates mean for inflation?

The Bank of Canada’s decision to begin tightening monetary policy follows the highest inflation in decades, which has eroded the Canadian dollar’s purchasing power and damaged the central bank’s credibility as a than an inflation fighter. It has also become clear in recent months that the Canadian economy has largely recovered from the pandemic-induced recession and no longer requires emergency monetary policy support.

Interest rate hikes theoretically lower both inflation and people’s expectations of future inflation.

Inflation hit a three-decade high of 5.7% in February, nearly three times higher than the bank’s 2% inflation target. Rising oil and agricultural commodity prices, which soared following Russia’s invasion of Ukraine, are putting additional pressure on consumers.

“The lesson of history is that if inflation expectations are no longer anchored, it becomes much more expensive to get inflation back on target,” Mr Macklem said in early March, which would mean the bank should raise its interest rates higher and faster.

What is the global landscape regarding interest rate hikes in other countries?

The Bank of Canada is not alone in signaling a more aggressive path to higher rates. Other central banks, notably the US Federal Reserve, have shifted in recent months towards the expectation of rapidly rising borrowing costs.

On March 16, the Fed raised its key rate for the first time since it cut it at the start of the pandemic. Fed officials expect to raise the rate at least six more times this year, according to projections released in mid-March.

Fed Chairman Jerome Powell said the central bank needed to move “quickly” toward tighter monetary policy. It is expected to make two consecutive interest rate hikes of 0.5 percentage points in May and June to fight runaway inflation, according to economists interviewed by Reuters who also say that the probability of a recession next year is 40%. The US Department of Labor said on Tuesday that US inflation jumped 8.5% in March from 12 months earlier, the biggest increase since December 1981.

Meanwhile, the Bank of England raised interest rates for the third consecutive time on March 17 in a bid to halt the rapid rise in inflation. The bank’s monetary policy committee voted to raise the interest rate from 0.5% to 0.75%, bringing the benchmark for borrowing costs back to pre-pandemic levels.

More reading:

Bank of Canada expected to announce outsized rate hike this week

As inflation soars and wages stagnate, Bank of Canada poll signals pressure for aggressive rate hike

Interest rate hikes could be bigger – and faster – due to inflation, warns Bank of Canada deputy governor

Bank of Canada Governor Tiff Macklem warns of rising inflation, signals aggressive rate hike path

Bank of Canada raises interest rate to 0.5%, pushing up borrowing costs for first time since 2018

Compiled by Abigale Subdhan.

With reporting by Mark Rendell and Reuters.

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