Inflation levels continue exceeding central banks' targets
Both the Bank of Canada and the United States Federal Reserve have signalled that rates will continue to rapidly rise until inflation is meaningfully lowered, according to Priscilla Thiagamoorthy of BMO Capital Markets.
The latest BoC hike has pushed the overnight rate to 1.5%, with multiple experts predicting another 50-basis-point increase likely in the central bank’s July 13 policy rate announcement.
“Inflation continues to run well above target and is only expected to increase further in the coming months amid excess domestic demand and global supply snarls,” Thiagamoorthy said. “The Bank has signalled it ‘is prepared to act more forcefully if needed’ in order to prevent high inflation from becoming entrenched.”
Last week, BoC deputy governor Paul Beaudry said that the institution might need to hike its key interest rate up to at least the higher end of its 2%-3% neutral range to effectively respond to the impact of mounting inflation levels.
In April, the Canadian consumer price index reached its highest point in 31 years with a 6.8% reading.
Read more: RBC: More outsized BoC rate hikes on the way
“The situation today is totally different,” Beaudry said. “Price pressures are broadening and inflation is much higher than we expected – and likely to go higher still before easing.”
Canadian productivity saw its seventh straight quarter of decline with a 0.5% downturn in Q1. This pushed up labour costs by 2.7% quarterly and by 8.5% annually, placing further upward pressure on inflation, Thiagamoorthy said.
