Canadians may see a 0.5% interest rate hike this week thanks to ‘persistent’ inflation

The Bank of Canada is likely to hike its benchmark interest rate another half a percentage point on June 1, further raising the cost of borrowing to tackle “persistent” inflation levels not seen in 30 years, economists predict.

Economists who spoke to Global News all said they expect the central bank’s key interest rate to rise to 1.5 per cent on Wednesday.

Money markets are also pricing in a hike of 50 basis points, economists confirmed.

Such a move would make the second consecutive jump of 50 basis points from the central bank. The last time it raised rates half a percentage point in back-to-back decisions was nearly 25 years ago, in December 1997 and January 1998.

Benjamin Reitzes, Canadian rates and macro strategist at BMO Capital Markets, told Global News that the hike is expected due to inflation figures remaining high through the first half of 2022. The 6.8 per cent inflation rate recorded last month was well above the Bank of Canada’s inflation forecast released at the start of April, which pegged year-over-year price growth around six per cent in the second quarter of the year.

Gas prices are among the areas expected to keep climbing in May, he noted, giving the Bank of Canada plenty of cause for concern in efforts to tamp down on the surging cost of living.

“Inflation is still the main story here. The Bank of Canada wants to push back on inflation and they do that by raising rates,” he said.

Inflation is beating initial expectations in part because of the prolonged war in Ukraine, according to TD Bank senior economist James Orlando.

Early in the conflict, economists had expected a “temporary spike” in prices due to gas and food supply chain constraints, but impacts three months into the war are “broader” and “much more persistent than previously thought,” Orlando explained. COVID-19 lockdowns in China contributing to global supply chain issues are among other factors.

Other central banks are also in a rate hike cycle, with the U.S. Federal Reserve also taking a half-percentage-point step in early May.

Reference:  2022 Global News, a division of Corus Entertainment Inc.