BoC faces calls for half-point hikes on ‘unmoored’ inflation outlook

Canadians are showing increased skepticism about the central bank’s ability to keep inflation on target, and that’s prompting more economists to call for a half-point hike at the next Bank of Canada policy meeting.

“If we still needed to cement the case for a half-point rate hike in April, the Bank of Canada’s Business Outlook survey provided it, at least in terms of inflation expectations,” wrote CIBC Capital Markets Chief Economist Avery Shenfeld in a note to Monday customers.

He was referring to the central bank’s new survey suggesting 70 per cent of business leaders expect inflation to be above three per cent over the next two years.

Shenfeld cautioned that the survey has “no predictive power” beyond the current quarter, but he acknowledged the central bank “wants to lean against” runaway inflation expectations.

It’s not just C-Suite leaders expressing concern about input prices. A separate survey of consumers, which was conducted in February and also released by the Bank of Canada on Monday, shows short-term inflation expectations have reached an all-time high as the median estimate was for inflation at 5.07 per cent in a year.

“Reading between the lines, it seems like inflation expectations are gradually becoming unmoored. Even though respondents see inflationary pressures fading as the pandemic and supply chain disruptions subsidize, the Bank of Canada needs to be on high alert to keep longer-term expectations anchored,” wrote Royce Mendes, head of macro strategy at Desjardins Securities, in a note to customers.

Similar to Shenfeld, Mendes also said he now expects the Bank of Canada will hike its main policy rate by half a point, to one per cent, at its meeting on April 13.

The Bank of Canada aims to keep inflation at the midpoint of its target range of one to three per cent. Statistics Canada’s consumer price index hit 5.7 per cent in February, which was the highest level since August 1991.

Economists from some of the other major financial institutions that were already on the record with calls for the Bank of Canada to raise its main policy rate by half a point next week pointed to the surveys as further evidence for that need. Here’s some of what they told customers in reports:

“Not that the Bank of Canada (BoC) needed any more convincing that it should aggressively raise rates next week. … The heat radiating from the Canadian economy is obvious and needs immediate attention from the BoC.”

-James Orlando, TD Economics

“The Bank of Canada will take solace in long-term inflation expectations remaining anchored, but the longer the current spell of well-above-target inflation persists, the more likely expectations will become unanchored. The ongoing inflation worries highlighted in the [Business Outlook Survey] only reinforce our expectations for a 50 basis point hike at next week’s policy meeting.”

-Benjamin Reitzes, BMO Capital Markets

“Clearly, the economy and inflation pressures are too firm to justify emergency-low levels of interest rates and we think the Bank of Canada is most likely to hike the overnight rate by another 50 bps later this month to follow up on the 25 bps increase in March.”

-Nathan Janzen, RBC Economics

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