The Bank of Canada is expected to raise its key rate by 0.75% on Wednesday

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The Bank of Canada is expected to raise its key rate by 0.75% on Wednesday

Bank of Canada Headquarters, Ottawa

Economists predict the Bank of Canada will raise its key interest rate by three-quarters percentage points on Wednesday, as global inflation soared.

In Canada, inflation reached in 39-year high of 7.7% in May, well above the 2% target rate that central banks usually aim for.

The Bank of Canada raised its policy rate by half a percentage point on June 1, bringing it to 1.5%. Since then, he has signaled a desire to move in a more aggressive direction.

The Governor of the Bank of Canada had indicated at a press conference the June 9 that further interest rate action may need to be taken to bring the interest rate back to the desired target.

Most economists now expect rates to rise by three-quarters of a percentage point, following the lead of the US Federal Reserve, which raised its policy rate by that amount last month.

“With the economy essentially at full employment, wages starting to move significantly and headline inflation poised to test 8% in the Consumer Price Index report this month, the Bank of Canada's task is clear in next week's decision.

— BMO Chief Economist Douglas Porter in a weekly report Friday

The C.D. Howe Institute Monetary Policy Council, a group of economists who assess the monetary policy of the Bank of Canada, also called on the bank to raise its key rate by three-quarters of a percentage point.

However, high inflation is far from uniquely Canadian. In the United States, it reached a record high of 8.6% in May, while it stood at 9.1% in the United Kingdom, the highest rate among countries in the world. G7.

The Bank of Canada has identified both domestic and international factors leading to a surge in inflation. Domestically, the bank says there is excess demand in the economy, while globally, supply chain issues and war in Ukraine continue to put upward pressure on prices.

HSBC Chief Economist David Watt said the Bank of Canada may reduce inflation due to domestic factors, but when it comes to global factors such as oil prices, the bank is in a more difficult position.

“One of the problems we have when discussing central banks is whether global inflation is going to stay high, whether they have a mandate to bring inflation below 3 at 2% and if international inflation does not cooperate, should they generate significant slowdowns in domestic economic activity?

—David Watt, HSBC Chief Economist

Stephen Gordon, professor of economics at Laval University, pointed out that the main motive for a larger rate hike would be to contain inflation expectations.

If the bank goes over 50 basis points, I think the reasoning is that they want to make sure expectations don't get too wild, Gordon added.< /p>

The most recent Bank of Canada Business Outlook Survey showed that Canadians believe inflation will stay higher than expected – and for a while. Canadians expect inflation to be 4% in five years, according to the survey.

Economists worry when individuals and businesses are beginning to anticipate high inflation as expectations impact future prices of goods and services as well as wage negotiations.

However, a recent report by the Canadian Center for Policy Alternatives warns that rapidly rising interest rates will likely push the Canadian economy into a recession and could cause significant collateral damage, including 850,000 job losses. #x27;jobs.

Nevertheless, Gordon said a rate hike of more than half a percentage point was warranted, adding that fears of ;a recession were premature.

I don't think we're anywhere close to that risk yet, because the policy rate is still low and the economy is working very well, he said.

Friday , Statistics Canada said the unemployment rate in June fell to a record low of 4.9%, indicating a strong labor market.

As the bank tries to get inflation under control, she hopes for what is called a soft landing, where inflation is brought under control without triggering a recession.

MM. Both Gordon and Watt explained that while the bank did not want to drag the economy into a recession, that could be the cost of bringing down inflation.

I don't think that would be something they would do eagerly, but if the return of inflation eventually necessitates a recession, I think they would be prepared to do so right now, Mr. Watt pointed out.

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