'Aggressive' BoC could be readying even larger rate hikes, says CIBC economist

"You cannot just talk yourself to lower inflation… You have to demonstrate that you're very serious"

'Aggressive' BoC could be readying even larger rate hikes, says CIBC economist

The Bank of Canada could be laying the groundwork for even larger rate hikes than the 50-basis-point increases of its last two policy rate announcements, according to a prominent economist.

Benjamin Tal (pictured top), deputy chief economist at CIBC World Markets, told Canadian Mortgage Professional that the content of the Bank’s latest statement suggested that it was considering a 0.75% hike in July to tackle an inflation crisis that shows little sign of slowing.

In Wednesday’s announcement, which saw a third consecutive hike to bring the benchmark rate to 1.5%, the central bank reiterated that rates must rise further and said it was prepared to act “more forcefully if needed” to get inflation under control.

“They used language that suggests, and I think the market will start pricing it in, that maybe they will go in 75-basis-point [increases],” Tal said. “The market is trying to figure out what it means. I still believe that we might go 0.5% [higher] at the next move, but I would not be surprised if the market was toying with the idea that the next move will actually be 0.75%.

“The Bank of Canada in its language clearly opens the door for this kind of interpretation. So we’re talking about a very aggressive Bank that means business – no question about it.”

The central bank slashed its trendsetting rate to a rock-bottom 0.25% as the COVID-19 pandemic took hold in March 2020, keeping that rate steady for nearly two years before announcing a quarter-percentage-point increase in March this year.

It’s introduced two so-called “oversized” rate hikes of a half point each since then as it grapples with inflation that’s ballooned to its highest level in over three decades, with the Bank signalling further concern on that issue in its latest announcement.

Read more: Bank of Canada announces another oversized rate hike

Consumer price index inflation of 6.8% remains well above the Bank’s forecast – and will likely spiral higher in the near term, according to the central bank, as “the risk of elevated inflation becoming entrenched has risen.”

Tal said the Bank’s view that inflation will continue to accelerate came as something of a surprise, especially since the market seemed to be considering the idea that it had peaked.

“The Bank is clearly worried about inflation expectations and the risk that… elevated inflation would be the norm,” he said. “That’s the nightmare as far as the Bank of Canada is concerned.”

Governor Tiff Macklem has already admitted missteps on the inflation issue, telling the Senate banking committee at the end of April that the central bank was still “adjusting” after coming out of the deepest recession in Canadian history. “We got a lot of things right,” he said. “We got some things wrong.”

Macklem and other Bank of Canada representatives, including deputy governor Toni Gravelle, had telegraphed their intention to implement another oversized hike long before its June announcement, with that move already long anticipated by market observers.  

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The central bank is facing something of a “credibility issue,” according to Tal, particularly when it comes to making sure it isn’t behind the curve on inflation.

The future of energy prices is also likely to be weighing heavily on the Bank’s mind, he added, especially after recent news that the European Union is planning to ban 90% of Russian oil imports by the end of the year.

In its announcement, the Bank said Russia’s ongoing invasion of Ukraine, COVID lockdowns in China and supply disruptions were negatively impacting activity and boosting inflation, with the war putting upward pressure on energy and agricultural commodity prices.

Those factors arrive amidst “strong” domestic economic activity, the Bank said, as job vacancies remain elevated and wage growth begins to gather pace across various sectors – pointing to likely solid growth in the second quarter of the year.

“Clearly the Russia situation complicated the picture with oil prices rising, so there are a few things that [the Bank] didn’t predict and… they are stuck with inflation that is higher than they expected. Therefore, they project that higher interest rate [increases] will have to be more forceful,” Tal said.

“You cannot just talk yourself to lower inflation. You have to do something – you have to demonstrate that you’re very serious. And that’s exactly what they’re doing, not only with their action but also with their language.”