© Reuters. A cyclist rides past the Bank of Canada building, Ontario, Canada, July 11, 2018. REUTERS/Chris Wattie
By Milounee Purohit
BENGALURU (Reuters) – The Bank of Canada will raise interest rates again in July to 5.00% after a surprise 25 basis point increase last week, according to economists polled by Reuters, who unanimously said the main risk was the central bank might have to do more.
In the run-up to the BoC’s shock move on June 7, most economists said there would be no further hikes this year, underscoring a sharp turnaround in sentiment rooted in widespread concerns inflation is not coming down fast enough.
After raising the overnight rate to a 22-year high of 4.75%last week, the BoC noted “monetary policy was not sufficiently restrictive” and showed concerns inflation “could get stuck materially above the 2% target.”
Inflation unexpectedly rose for the first time in 10 months to 4.4% in May and activity in the normally interest-rate-sensitive housing market has rebounded, suggesting rates still aren’t quite high enough.
The BoC will hike its overnight rate by 25 basis points to 5.00% at next month’s meeting, according to 20 of 25 economists in a snap June 8-13 Reuters poll. The remaining five expected the bank to hold at 4.75%.
“When you resume hiking, you don’t resume for one 25 basis point hike. Otherwise, it’s better to do nothing,” said Sebastien Lavoie at Laurentian Bank, one of the few economists who correctly predicted a hike last week.
Also the only economist who now expects two more quarter-point moves at the next two meetings, Lavoie said “a 25 basis point hike as they did last week doesn’t buy much conviction that inflation will be at 2% at some point in 2024.”
All but three of 25 economists forecast the overnight rate to peak at 5.00% or higher, 50 basis points more than was predicted in the last survey published on June 2.
All 21 respondents who replied to a separate question said the bigger risk to their terminal rate forecast was that it would be higher than they now expect.
“At the core, the view is that the labour market is still very tight, and now even the housing market is starting to improve…(and) that really does raise questions whether policy is tight enough at this point,” said Doug Porter, chief economist at BMO Capital Markets.
“The bigger risk to the outlook is we all get surprised at how persistent underlying inflation is.”
House prices, a major component of the inflation basket, have already started rising again and are set to recover further on the back of still-resilient demand, according to a separate Reuters survey taken before the surprise move.
The economy grew at a much faster-than-expected 3.1% annualized pace in January-March after a contraction in the quarter before, beating the central bank’s projection, one reason why the central bank resumed hiking.
Only one of 25 economists expected a rate cut this year, compared with five in the last poll. There was no clear consensus on where rates would be by end-Q1 2024, partly because fewer economists have settled on a policy outlook for next year.
(For other stories from the Reuters global economic poll:)
Source: Investing.com
