Home NewsEconomy News Canadian inflation expectations bolster case for supersize rate hike By Reuters

Canadian inflation expectations bolster case for supersize rate hike By Reuters

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Canadian inflation expectations bolster case for supersize rate hike By Reuters



© Reuters. FILE PHOTO: A sign outside the Bank of Canada building in Ottawa, Ontario, Canada, on May 23, 2017.REUTERS/Chrisvarti/File Photo

Julie Gordon and Steve Sheller

OTTAWA (Reuters) – Canadian consumer inflation expectations have soared, hitting new highs in the short term and rising “significantly” in the longer term, a Bank of Canada survey showed on Monday, supporting a rise in calls for a very rare 75 basis point interest rate.

“Consumer inflation expectations have risen, along with concerns about food, gas and rental prices,” the central bank said in its second-quarter survey of consumer expectations. “In general, inflation is now seen as more prevalent.”

In a separate survey, the bank found that companies expect high inflation to persist for longer, with companies eyeing record wage growth over the next 12 months, with many planning to pass the higher costs on to customers.

Both surveys reinforce calls for the Bank of Canada to raise interest rates by 75 basis points in its next decision on July 13. It would be the largest rate hike since August 1998, when the bank raised rates by 100 basis points to defend the currency.

“In particular, long-term (consumer) inflation expectations have risen sharply,” Andrew Grantham, senior economist at CIBC Capital Markets, said in a note, adding that a broad-based rise was “not good news” for the central bank.

Inflation in Canada hit a near 40-year high of 7.7% in May, and prices are set to move higher before falling back later this year. The bank has signaled a willingness to act aggressively to prevent price increases from becoming entrenched.

The central bank’s concern is that price increases will be self-fulfilling – the expectation of price increases will lead to higher demand for wages and accelerated purchases, driving prices up further.

In its business outlook survey, the bank found that companies expect inflation to average more than 3% over the next two years, and nearly a quarter of respondents expect prices to rise “well above” over the next three years or more 2% target.

Businesses also plan to raise wages to attract and retain workers, the bank said, with firms now expecting wage growth to average 5.8% over the next 12 months, up from 5.2% in the previous survey.

The Canadian dollar was down 0.1% at 1.2890, or 77.58 US cents. Money markets are betting that the policy rate will reach 3.25% to 3.5% by the end of the year, up from a record low of 0.25% in early 2022.

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