Given current trends, the central bank will be compelled to continue increases, analyst says
Further strength in the employment sector coupled with a decline in the jobless rate and a sharp acceleration in wage growth in May are placing more pressure on the Bank of Canada to continue raising interest rates to the mid-point of its 2%-3% neutral range, according to Andrew Grantham of CIBC Capital Markets.
Last month saw Canadian employment rise by approximately 40,000 posts, which considerably exceeded experts’ predictions of a 27,500 gain. This drove the unemployment rate down to a record low of 5.1%, as Grantham explained.
“Continued solid momentum in the economy, combined with signals that inflationary pressures may be worsening rather than easing, means that the Bank of Canada could well raise interest rates a little higher than we had previously expected,” Grantham said.
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Taking these trends into account, Grantham said that CIBC is now anticipating a peak BoC overnight rate of 2.75% before the end of 2022, significantly higher than its previous prediction of 2.5%.
However, “we still expect that growth and inflation will slow enough later in the year to prevent the Bank of Canada from having to take rates above the 3% upper bound of its neutral range,” Grantham stressed.
