Inflation: Has the Bank of Canada been too accommodating?

Desjardins economists, who have so far been more reluctant to make bold predictions regarding the decisions of Canada’s central bank, titled their Wednesday economic study in reference to the summer period:: hot ahead!”,”text”:”Inflation in Canada: hot ahead!”}}”>Inflation in Canada: hot ahead!

Indeed, financial institutions are now unanimous: in light of last month’s meteoric jump in the consumer price index, which at a peak since January 1991the Bank of Canada is expected to raise its key rate by 50 basis points next June 1 following doing so for the first time in more than 20 years last week.

Normally, as was the case in early March, the increases are more moderate, at 25 basis points.

If this prediction comes true, then the rate will have gone from 0.25% to 1.5% in just three months.

The pressure on the portfolio of households who have taken out variable rate mortgages in the last two years will not go unnoticed. For a $400,000 home with a 20% down payment, for example, payments can go up by at least $200 per month.

And it will not be over, since the Bank of Canada wants to gradually bring inflation below 3% in 2023 and to the target of 2% in 2024.

To do this, several increases in the key rate will therefore be necessary, enough to easily exceed the rate of 1.75% before the pandemic. The markets indicate, according to Bloomberg, that this rate might reach 3.25% next year.

At the same time, it should be recalled, the prices of goods and services have respectively exploded by 9.2% and 4.3% over the past year. To your budget! Especially since the purchasing power of Canadians has eroded during this time: the average hourly wage in the country has increased by only 3.4%.

Whose fault is it?

Scotiabank is not soft on the Bank of Canada, accusing it to have left lying around [sa politique monétaire] every step of the way, which is a big part of why we got inflation numbers like these. Economic growth and low unemployment should have prompted the central bank to act sooner, she said.

This financial institution now believes that there are even strong arguments for a key rate hike of 75 to 100 basis points…all at once. According to her, inflation in April on an annualized basis might exceed 8% with the addition of used vehicle prices in the consumer price index, which would be unheard of since the beginning of the 1980s.

Senator and economist Clément Gignac also supported Economy zone Wednesday that the big boss current inflation data is the Bank of Canada, which has too late to raise interest rates. The probability of a recession over the next year would therefore now increase to 35%. The risks are higher, it goes without sayinghe said.

However, central bank governor Tiff Macklem and his economists are not alone in the dock.

Breaks in supply chains extended by politics zero-COVID in China, the full reopening of the economy, wage increases stemming from labor shortages, and pressures from the conflict in Ukraine on energy and food costs are largely contributing to maintain prices at record highs.

Economy zone: interview with senator and economist Clément Gignac