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Bank of Canada to hike interest rates Wednesday by three quarters of a percentage point, experts predict

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Canada’s central bank is expected to raise its key overnight rate, the fifth rate-hike this year, as the Bank continues to struggle with inflation.

In ordinary times, the Bank of Canada hiking interest rates by three-quarters of a percentage point all at once would be shocking.

But we’re not in ordinary times, and that’s one reason why experts say that’s exactly how much the country’s central bank will raise its key overnight rate on Wednesday.

It would be the fifth rate hike this year as the Bank tries to get a handle on sky-high inflation. In July, the Bank stunned observers by raising the overnight by a full percentage point, to 2.5 per cent. The overnight rate began the year at 0.25 per cent, where it had been since the BoC dropped it three times in a month in March 2020, as the global COVID-19 pandemic was declared.

A slightly smaller one than the July hike is in the cards this time around, predicted National Bank Financial’s Taylor Schleich.

“We’re certainly more cognizant of the risk of a second straight 100-basis-point, interest-rate hike, and we think it’s a greater risk than is broadly appreciated. Nonetheless, we still expect the Bank to deliver a relatively smaller (but still massive) 75-basis-point rate increase,” Schleich wrote in a research note.

While anything from 50 basis points (half a per cent) to 100 (a full percentage pont) is possible, 75 points would be most consistent with the Bank’s own public statements, Schleich said.

Another key predictor of what the Bank might do — or, at least, what investors are expecting — is the yield on the Canadian government’s five-year bond. As of Friday afternoon, that was at 3.26 per cent, pointed out James Laird, co-founder of Ratehub.ca. A 75-basis-point hike would bring the overnight rate to 3.25 per cent.

“Seventy-five is most likely. Fifty basis points is possible, and the third most likely is 100 points. But there’s almost certainly going to be an increase,” said Laird.

Data from Statistics Canada showed prices were 7.6 per cent higher in July than they were a year earlier, as measured by the basket of goods in the Consumer Price Index. While that’s lower than the 8.1-per-cent increase seen in June, it’s still high by historical standards, said Pedro Antunes, senior economist at the Conference Board of Canada.

“We’ve heard from the governor that the Bank feels inflation may have peaked. But the fact is we’re still going to see some pretty solid numbers with core inflation,” said Antunes, referring to the non-energy part of the CPI.

Douglas Porter, chief economist at BMO, agreed the Bank is likely to keep pushing ahead.

“We’re skeptical inflation will melt away quickly,” said Porter. “We’re still probably going to be north of seven per cent on headline inflation (for August) and that’s far too high for anyone’s comfort, and it means the bank can’t relax.”

While a smaller, 50-point rise isn’t out of the question because of evidence the Canadian economy shrank slightly in July, a 75-point rise has grown more likely because of hawkish sentiments from the U.S. Federal Reserve, argued Leah Zlatkin of lowestrates.ca, a website that provides quotes for insurance, mortgages, credit cards and loans.

Simply put, central bankers tend to march in something resembling lockstep, especially when they’re from neighbouring countries with heavily-intertwined economies, as those of Canada and the U.S. are, Zlatkin said.

“It looks like the U.S. is going to come down drastically on inflation. And they’re going to make some moves …. So I think it’s probably going to be a 75,” said Zlatkin, who had leaned toward a 50-point rise before a hawkish speech Aug. 26 by Jerome Powell, chair of the U.S Federal Reserve, at the Jackson Hole Economic Symposium in Wyoming.

Powell said controlling inflation is the Fed’s top priority, and that doing it could require a “sustained period” of slow U.S. economic growth.

Source : The Star