Chances of 75 basis-point rate hike from the Bank of Canada just went up

The stakes just went up in the battle against inflation.

Data out Friday not only turned up the heat on the central bank here, but also south of the border.

In Canada, the numbers showed the unemployment rate at a new low and revealed that the tight labour market was putting pressure on wages.

“With wage growth accelerating, the chance of the Bank of Canada following through with its hint of a larger 75 bp [basis point] interest rate hike in July have risen,” wrote Capital economist Stephen Brown.

Brown is not alone. Other economists now see the Bank having to move faster and stronger to quell inflationary pressures.

The Bank faces a hard choice in light of this new data, wrote Carlos Capistran of BofA Global Research, who expects a 50 basis point hike in July, but says the risk of a 75 point hike has increased.

CIBC changed its rate forecast Friday, saying solid momentum in the economy and signs that inflation is getting worse, not better, means the Bank may have to raise rates higher than their economists expected. They raised their call from a rate peak of 2.5% to 2.75%.

Meanwhile in the U.S., data Friday showed that inflation is running hotter than expected, not something any central banker wants to hear these days.

Soaring gas and food prices pushed the U.S. consumer price index up to 8.6%, higher than the 8.3% forecasted.

A half-point hike is widely expected when the Fed meets this week and another in July, following the 50-basis point hike in May. In just three months that is more policy tightening than the U.S. Federal Reserve did in all of 2018, says Reuters.

After Friday’s data traders were pricing in an even bolder path. There is now better than even odds of a 75-basis-point hike by July and a policy rate of 3 to 3.35% by year end.

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