Bank of Canada "cranks up warning meter" on inflation: BMO economist

The central bank appears more concerned than before on the inflation crisis, expert says

Bank of Canada "cranks up warning meter" on inflation: BMO economist

The Bank of Canada’s decision to raise its benchmark interest rate by a further 0.5% on Wednesday came as little surprise – but the language of its announcement suggests it is more concerned than before on inflation and prepared to introduce even more substantial rate hikes, a prominent economist has said.

Doug Porter (pictured), chief economist at BMO Capital Markets, told Canadian Mortgage Professional that the central bank had all but confirmed that at least a further half-point increase was imminent in its next interest rate announcement, scheduled for July, with a larger individual hike also possible.

“[The Bank] sounded maybe even a little bit more concerned about inflation potentially getting entrenched and seemed to crank up the warning meter a little bit further,” Porter said. “Certainly, the half percentage point hike was almost completely baked in the cake.

“The widespread assumption was that they would follow it again in July with another half-point move; they did not nothing to dissuade that. If anything, I think one of the key takeaways is that if they’re going to veer from that, it’s more to the upside than to the low side.”

A third successive 50-basis-point increase remains the likely outcome of that July meeting, Porter said, with half-point hikes likely to be the name of the game as the Bank attempts to reach its targeted neutral rate – the interest rate expected to keep inflation constant while supporting the economy at full employment – of 2.5%.

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

Inflation has skyrocketed in recent months, swelling to its highest level for more than three decades, and the Bank indicated in Wednesday’s announcement that it expects CPI (consumer price index) inflation to creep even higher before eventually easing.

There’s now an increased risk of elevated inflation becoming entrenched, the central bank said, and the global economy is slowing thanks to inflation exacerbated by the Russia-Ukraine crisis, COVID-19 lockdowns in China and ongoing supply chain snarls.

Those factors were pushing energy and agricultural commodities prices up, the Bank outlined, a development that was “dampening the outlook” especially for Europe.

Porter said heightened concern over inflation was clear in the Bank’s statement, particularly given the significant revision of its earlier forecasts on the issue.

“[In] mid-April, they thought inflation was going to top out in the high fives in the first half of the year, [but] as it stands right now, we think we’re looking at an over 7% inflation rate in May when the report comes out,” he said. “So just in a matter of weeks, the Bank has really been taken by surprise at the ferocity of inflation.”

On the domestic front, the Bank noted economic activity to be strong and said that the economy was operating “in excess demand.” GDP growth of 3.1% in the first quarter of the year matched the central bank’s April projection, and it also reported elevated job vacancies, widespread labour shortages and accelerating wage growth.

Read next: Bank of Canada announces another oversized rate hike

“With consumer spending in Canada remaining robust and exports anticipated to strengthen, growth in the second quarter is expected to be solid,” the Bank’s announcement read.

Still, the central bank struck a somewhat optimistic tone on the domestic economy despite some recent doom, gloom and a furore around a possible recession.

“The Bank actually did sound relatively positive on the Canadian economy,” Porter said. “There’s a lot of chatter out there about the possibility for a downturn… There’s a lot of concern about the economy. The Bank doesn’t see things that way – it sees a lot of resiliency in the economy.”

While Bank officials including Governor Tiff Macklem have admitted missteps in handling inflation in recent weeks, Porter pointed out that the inflation crisis was a global issue – and that the Bank had handled it a tad more competently than other central banks.

“Almost every central bank in the world has made the same mistake, and some more so than others,” he said. “I actually think in many respects, the Fed was even worse because the US had earlier and even stronger inflation readings than Canada did, and the Fed waited even longer to change their tune and start raising interest rates.

“At least the Bank was already starting to eye the exits last year – the Fed wasn’t even close. The reality is the Bank can only do so much on its own.”

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