Interest rates

Inflation expected to exceed 8%, pointing to higher interest rates

Data released on Wednesday will likely put more pressure on the Bank of Canada

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Canada’s main inflation gauge likely topped 8% in June, complicating Bank of Canada Governor Tiff Macklem’s efforts to convince businesses and households that price pressures will eventually ease.

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Statistics Canada is due to update its consumer price index on Wednesday morning. Monthly reports have become sources of alarm, as the year-over-year variation has exceeded 3% – the upper limit of the Bank of Canada’s comfort zone – for more than a year.

May’s consumer price index rose 7.7% from a year ago, and most economists expect the gain to top 8% last month. Such a reading would be in line with the Bank of Canada’s forecast that inflation would hover around 8% over the next few months, before dropping to 3% in the second half of the year.

However, such rapid inflation would put additional pressure on the central bank to deliver another oversized rate hike in its next interest rate decision in September. The Bank of Canada surprised many observers last week with a full point increase, the largest since 1998.

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During online seminar Last week with the Canadian Federation of Independent Business, Macklem reaffirmed the central bank’s commitment to bringing inflation back to its 2% target, the midpoint of a 1% to 3% target zone.

“By initiating interest rate increases, we are trying to avoid having to resort to even higher interest rates,” Macklem told an audience on July 14. “Initial crunch cycles tend to be followed by softer landings.”

Macklem added that the central bank expects the economy to grow 3.5% this year before slowing to 1.75% next year. Despite an expected economic slowdown and high inflation for decades, Macklem said he believed Canada could avoid a 1970s-style environment of stagflation because at the time the economy had already been overheated in the past few years. years preceding a decade of high inflation and disappointing economic growth.

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The high inflation we have today is not normal, it is not here to stay

Governor of the Bank of Canada, Tiff Macklem

Another difference between then and now is that countries during the 1970s abandoned the Bretton Woods system which provided for a currency peg to the US dollar, which was pegged to gold prices.

“It was the monetary anchor, but it hasn’t been replaced by a new anchor,” he said. “Monetary policy was adrift. He answered slowly. Inflation expectations have increased. There was a wage-price spiral and the result was that we had very high inflation for a decade. It took, unfortunately, a very deep recession in the early 1980s to bring it down.

The Bank of Canada July monetary policy report highlighted global supply challenges such as the Russian invasion of Ukraine and China’s pursuit of a zero COVID policy as recent disruptions that are expected to unwind over the next year. The report predicts inflation will peak in the third quarter before tapering off as these supply issues ease and demand slows.

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However, the central bank acknowledged that it had failed to make its forecasts in the past, pointing to these same global factors, which caused supply shortages and soaring commodity prices and manufacturing costs. shipping, as the reason for missing two-thirds of its inflation target.

  1. Tiff Macklem, Governor of the Bank of Canada, at the Bank of Canada in Ottawa in April.

    Exclusive: Tiff Macklem on the Bank of Canada’s surprise rate hike, the fight against inflation and his missed forecasts

  2. Governor of the Bank of Canada, Tiff Macklem.

    Bank of Canada announces sharp rate hike to crush inflation

  3. The price of food purchased from stores rose 9.7% in May from a year ago.

    Canadian grocery suppliers announce more price hikes at grocery stores this fall

Bank of Nova Scotia economists have revised their inflation outlook and now expect the consumer price index to average 7.1% this year, after peaking in July , before slowing to 3.6% in 2023.

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“A wide range of supply chain and input price indicators suggest inflation will ease in the coming months,” chief economist Jean-Francois Perrault said in a statement. July 18 report. “Yet despite this and a marked downward revision to the growth outlook (to 3.5% growth in 2022), incoming inflation has been higher than expected and wage pressures suggest that inflation will be higher than expected in 2023.”

Perrault and his team expect the Bank of Canada’s key rate to peak at 3.5% later this year and stay at that level through 2023. He added that they don’t expect that the central bank raises rates above that level only to cut them next year. .

Macklem has signaled throughout the year that the Bank of Canada is tightening pressure on inflation and that Canadians should not expect these levels to persist indefinitely.

“The high inflation we have today is not normal, it’s not here to stay,” he told CFIB. “We are resolute in our commitment to lower inflation.”

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