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Bank of Canada Poised for Historic Rate Hike Amidst Economic Surge

As Canada's robust economy outperforms expectations, analysts forecast a significant interest rate increase from the Bank of Canada.

Bank of Canada
Bank of Canada

Historic Hike on the Horizon

Analysts are predicting the Bank of Canada (BoC) to raise its primary overnight rate by a quarter of a percentage point to 5.00% this Wednesday. This would mark the highest rate in 22 years, driven by economic growth, a thriving labor market, and persistent core inflation.

Previous Measures in Monetary Policy

Just last month, the Canadian central bank pushed its overnight rate to 4.75%, the highest since 2001, following a five-month hiatus. The bank mentioned that existing monetary policies weren't restrictive enough and that future adjustments would hinge on forthcoming economic data.

Steady Economic Growth Fuels Rate Increase

Despite indications of slowing, the Canadian economy has remained resilient. The housing market, too, has displayed a resurgence despite nine rate hikes amounting to 450 basis points since March of the previous year. May saw a renewed economic momentum, possibly growing by 0.4%, after a stagnant April.

Persistent Inflation Pressures

Economists Royce Mendes and Tiago Figueiredo from the Desjardins Group noted that inflation has exceeded the BoC's 2% target for 27 straight months, with no signs of abatement. They predict a rise of the BoC policy rate to 5.00% and potentially more increases this fall.

Economists' Expectations

Of 24 economists surveyed by Reuters, 20 anticipate the central bank will lift rates by another quarter of a percentage point and hold steady well into 2024. Money markets forecast over a 70% likelihood of a Wednesday rate hike, with complete pricing-in anticipated by September.

A Glimpse at Inflation and Employment

Despite headline inflation dipping to 3.4% in May, less than half of the previous year's peak of 8.1%, the three-month annualized rates of BoC's core measures have only just declined slightly. Meanwhile, June saw a surge in job creation, exceeding predictions.

Rate Hike: A Probable Outcome

According to Doug Porter, Chief Economist at BMO Capital Markets, a Wednesday rate hike seems probable but is not set in stone. The BoC could defer the increase in borrowing costs until September. Porter noted that despite substantial rate hikes over the past year, the economy hasn't suffered much, while inflation continues to overshoot the BoC's 2% target.