Interest rate outlook
With interest rates now on the rise, two perennial questions have popped up again: How much? How fast?
Traditionally the Bank of Canada has used 25 basis points, or one-quarter of a percentage point, as the standard increment for any interest rate move up, or down. Occasionally the Bank will move its trendsetting Policy Rate by 50 basis points, as it did at its last setting on April 13.
The last time the central bank boosted the, so-called, overnight rate by half a percentage point was 20 years ago. Now the Bank seems to be laying the ground work for an even bigger increase of 75 basis points, or more, at its next setting in June. There has not been a three-quarter point increase since the late 1990s.
Inflation remains the key concern for the BoC. In March the inflation rate hit 6.7%, a 30-year high. The central bank wants to see inflation at around 2.0%. But it does not expect that to happen until sometime late next year.
During an address in Washington D.C. last week Bank of Canada Governor Tiff Macklem reportedly told world finance ministers, and his central banking colleagues he will “not rule anything out” when it comes to interest rates and taming inflation.
“We're prepared to be as forceful as needed and I'm really going to let those words speak for themselves," Macklem said.
Macklem and the Bank of Canada might be seen to be trying to get out in front of inflation.
Inflation is, what is known as, a “lagging” economic indicator. That is, it shows up as the result of other economic factors. Some market watchers say the Bank should have acted sooner to bring it under control.
While higher inflation was not unexpected as the economy recovered from the pandemic, it is lingering longer than anticipated. The Bank says this is largely due to on-going waves of COVID-19, particularly in China, that have disrupted manufacturing and the supply chain; the Russian invasion of Ukraine; and spending fuelled by those rock-bottom interest rates that were designed to keep the economy moving during the pandemic.
The Bank is thought to be aiming for a Policy Rate of between 2% and 3%. That is considered a “neutral” rate that neither stimulates nor restrains the economy. At the current pace, that could be reached by the fall.