Strong economic recovery and mass vaccine roll-outs will motivate the decision
Multiple inflationary pressures will force central banks to start raising interest rates as soon as next year, according to Royal Bank of Canada CEO Dave McKay.
Among the leading factors will be the strong economic growth expected in the second half of 2021. This will be impelled by mass vaccinations and substantial consumer liquidity, which McKay estimated to be in the order of roughly $212 billion in Canada.
The segments labouring under the worst effects of the COVID-19 pandemic, such as the hospitality and food industries, will likely enjoy the strongest recovery, McKay added.
“When you look at input prices – commodities, labour, goods and services – we see inflationary pressure building earlier than later,” McKay told Bloomberg.
This optimism ran counter to the views of more than half of economists (52%) polled recently by Finder, who predicted that the Bank of Canada’s overnight rate will remain on hold up to at least 2023. Another 38% believe that the rate will move upward in the second half of 2022, while just 9.5% believe that a hike will happen early next year.
A major consideration will be the need for the BoC to maintain its inflation targeting strategy, in which the current record-low rates play a crucial role.
Despite Canada’s vaccine roll-out, “we will have a month or two lag in reaching the same level of vaccinations as the US, and that will translate into a delayed restart to some types of economic activity,” warned Avery Shenfeld, managing director and chief economist at the Canadian Imperial Bank of Commerce.
