May 19, 2023
Another interest rate hike? Economists divided on Bank of Canada's next step
Canada's job market remains strong more than one year into the Bank of Canada's rate hiking cycle
An unexpected rise in Canadian inflation, coupled with an uptick in housing activity, has economist divided on whether the Bank of Canada will raise interest rates next month.
In a note to clients on Thursday, Jean-Francois Perrault, senior vice-president and chief economist at Scotiabank, argued that the country’s central bank no longer has the luxury of taking a wait and see approach to inflation. In this environment, he considers an additional rate hike as insurance against inflation.
“We now think a 25 basis points move is required at the June meeting,” he wrote in the note.
The consumer price index climbed to 4.4 per cent on an annual basis, according to Statistics Canada. This spike was unexpected by economists. It is also the last significant economic data point the country’s central bank will have before heading into their next rate meeting.
He added that Bank of Canada Governor Tiff Macklem should leave the door open to further rate hikes this year should they be warranted.
The majority of the economists tracked by Bloomberg are calling for a continued pause by the central bank, but Perrault isn’t alone in his expectations for an increase. Veronica Clark, an economist from Citigroup, was actually the first to call for rate hike earlier this week.
“The Bank of Canada is literally saying we’re waiting to see if we’ve done enough, and none of the data is telling you that you’ve done enough," Clark told Bloomberg in an interview on Tuesday.Clark has also forecasted a 25 bps hike next month on the back of sticky inflation.
Another point of concern within Scotiabank’s report was the acceleration in Canada’s housing activity, the report detailed.
While Canadian home prices did decline over the past several months, the rate pause environment has brought homebuyers back to the market -- causing a spike in prices once again. The BoC could dampen this activity with marginally higher rates, he said.
While inflation remains too high for comfort in Canada at the moment, the report does forecast a gradual decline ahead.
“We continue to believe that the BoC will not cut its policy rate this year and that it will undertake a gradual series of cuts in early 2024,” he said.
CALLING FOR A HOLD
The calls for a rate hike next month would do more harm than good in BMO’s Chief Economist Doug Porter's eyes.
“Forget about rate cuts later this year—the bigger risk is that many central banks will still be hiking in the months ahead,” he wrote in a note to clients on Friday.
Porter agreed that April’s inflation read wasn’t really that much of a shock and fundamentally the inflation picture has not changed.
He advised that the BoC should wait at the very least for May’s inflation data prior to making a rate hike decision instead of pinching the economy any further.
“Our official call is that the Bank (and the Fed) will keep rates steady at current levels through the remainder of the year,” he said.