Royal Bank of Canada Chief Executive Officer Dave McKay says inflationary pressures will force central banks to start raising interest rates as soon as next year.

Large amounts of liquidity on consumers’ balance sheets, which he estimated at US$1.6 trillion in the U.S. and $212 billion (US$168 billion) in Canada, combined with vaccines and new stimulus programs will lead to strong economic growth in the second half of 2021, McKay said at the bank’s financial institutions conference Tuesday.

The recovery will be particularly strong in sectors that have been hit hardest by the COVID-19 pandemic, like hospitality and food, and will use up the excess capacity in the economy this year, ahead of a previous forecast for next year, he said.

“Therefore when you look at input prices -- commodities, labor, goods and services -- we see inflationary pressure building earlier than later,” McKay said.

Those expectations have already started filtering into credit markets, lifting rates at the long end of the curve. Central banks, particularly the Federal Reserve, have signaled they’ll let that continue, but they may respond earlier than previously expected, McKay said.

“We do see a challenge to the policy and central banks having to respond to this in 2022, latter half of 2022, with rate increases -- versus where you might have thought late 2023 or 2024 six months ago,” McKay said.