By Ketki Saxena
Investing.com – With the background of a resilient economy and robust employment, the Bank of Canada now appears to be in a position to tackle inflation without curtailing the post-pandemic recovery. A 50 basis point or half-percentage point hike is widely expected at the Bank's policy announcement tomorrow, including by analysts at all of Canada’s big six banks - BMO (TSX:BMO), CIBC (TSX:CM), RBC (TSX:RY), TD (TSX:TD), BNS (TSX:BNS), and National Bank.
Latest CPI figures show headline inflation at 5.7%, well outside the bank’s target of 2 % and the control range of 1 to 3%. Meanwhile, the Canadian economy is firing on all cylinders and has recovered all output lost during the pandemic. Canada's economy grew 6.7 % in the fourth quarter on an annualized basis, beating analyst expectations of 6.5 %.
Employment, the BoC's de-facto dual mandate, is at an all-time high, and well above pre-pandemic levels with 442,000 more people in the labour force than in February 2020. The unemployment rate is at 5.3%, the lowest level in the five decades for which the data is available.
The Bank of Canada’s business outlook survey last week further indicates positive economic sentiment, as firms remain buoyed by robust demand, and plan to increase investment and add staff. Wage growth, however, has not kept up with inflation, and as of March grew only 3.4% on an annual basis.
The BoC has so far refrained from aggressive measures to tackle inflation, raising rates a quarter percentage point from 0.25% to 0.50% at its last meeting on the 1st of March. However, Deputy Governor Sharon Kozicki noted in late March that the bank is ready to act "forcefully" to tackle inflation.
The Bank may also announce quantitative tightening (QT) tomorrow, although as noted by analysts at ING, “The BoC may simply end reinvestments of maturing assets rather than the Fed’s proposed “phased in” caps for what is allowed to roll off the balance sheet.” Over a third of BoC’s asset holdings have a maturity of two years or less.
The case for a 50 basis point hike tomorrow seems straightforward. As summarized by Benjamin Reitzes, Canadian rates and macro strategist at BMO Capital Markets, "Given that they (the BoC) are already well behind the curve on tightening and inflation is well above their 2% target, there's really no reason for them to wait any longer and they really should be getting policy rates up to neutral as quickly as they can”.
However, it’s also possible that Canada’s central bank may surprise markets tomorrow by either keeping rates steady (unlikely) or hiking the policy rate only 25 basis points. It’s worth noting that analysts had priced in an initial 25 basis point hike in January, at which time the Bank held its rate steady.