The central bank's policy rate is currently right at the midpoint of the institution's "neutral" range
The Bank of Canada’s massive 1% rate hike could herald more increases in the near future, according to veteran economist Sherry Cooper.
“[July 13] Bank of Canada reports confirmed that the Governing Council continues to judge that interest rates will need to rise further,” Cooper said in a new analysis.
“Once again, the bank asserted it is ‘resolute in its commitment to price stability and will continue to take action as required to achieve the 2% inflation target.’”
The latest increase placed the central bank’s policy rate at 2.5%, which Cooper described as the middle point of the institution’s “neutral” range.
“This is the level at which monetary policy is deemed to be neither expansionary nor restrictive. Governor Macklem said he expects the bank to hike the target to 3% or slightly higher. Before [July 13], markets had expected the year-end overnight rate at 3.5%,” Cooper said.
Read more: Bank of Canada announces huge rate hike
The hike came as the BoC continues its policy of quantitative tightening by reducing its holdings of government of Canada bonds, “which puts additional upward pressure on longer-term interest rates.”
“The bank is particularly concerned that inflation pressures will become entrenched. Consumer and business surveys have recently suggested that inflation expectations are rising and are expected to be higher for longer,” Cooper said. “Central banks worldwide are aggressively hiking interest rates, and growth is slowing. … Further excess demand is evident in the Canadian economy.”
