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“Unwelcome” Inflation Keeps BoC Policymakers “Up at Night”

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Hot off May’s scorching 7.7% inflation reading, the Bank of Canada’s top brass is reiterating that sizeable rate hikes are sure to come in the near future.

In a “fireside chat” at the Globe and Mail Future event, BoC Senior Deputy Governor Carolyn Rogers said the 40-year broken inflation record — an “unwelcome” though not “entirely unexpected”  development — keeps monetary policymakers “up at night”.

“Inflation is too high, it’s hurting Canadians. It’s keeping us up at night and we will not rest easy until we get it back down to target… That’s why we’re raising interest rates and as we say, we’re raising them quite aggressively,” she said to reporters.

READ: Federal Government Outlines $8.9B Plan to Help Offset Inflation Pain

Statistics Canada revealed this morning that the rate of inflation hit its highest level since January 1983. That’s even higher than an aggressive forecast of 7.4% made by the Bank of Montreal, and a considerable increase from April’s 6.8% print. It also dwarfs the conservative call made by the Bank of Canada’s spring forecast of an average of 5.8% in Q2.

Rogers also further cemented expectations that the BoC will implement a three-quarter-point rate increase — the largest in recent memory — on July 13. Such a gargantuan policy move has been largely anticipated since the U.S. Federal Reserve did the same last week, following the country’s own worrisome inflation reading of 8.6%.

“Overall economic activity appears to have picked up after edging down in the first quarter. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures,” stated the U.S. Fed’s announcement at the time.

“We’ll take the July decision when we get to July,” Rogers told reporters. “We’ve been clear all along, the economy is in excess demand, inflation is too high, rates need to go up.”

Rob McLister, Mortgage Strategist at MortgageLogic.News told STOREYS at the time of the U.S. Fed’s hike that the BoC “may have little choice” but to follow in the Fed’s footsteps, as the two central banks routinely coordinate given their economic ties. The BoC is fully cognizant of potential cross-border economic imbalances (e.g., adverse currency effects) if it were to take a harder line than the Fed.

He added that while he wouldn’t necessarily be surprised to see a full-point increase given how out of alignment inflation expectations have become, the bond market still continues to price at a maximum of 0.75%.

In her remarks, Rogers doubled down on the BoC’s longstanding mandate to reign inflation into a range of 2-3%, and the three hikes made thus far this year have had the intended effect of slowing consumer spending and debt appetites. From a global perspective, there should also be some inflation relief as the impacts of the pandemic continue to fade.

“We see a path to do that. Our view is that we can take some of the excess demand out of the economy and bring it back into balance,” she said.

Housing prices started to rapidly cool following the BoC’s rate of 0.25% rate liftoff in March; according to the Canadian Real Estate Association, the national average home price was $711,316, a drop of more than $100,000 from the price peak recorded in February. Additional analysis from RBC Economics has claimed the market is in “full-blown cooling mode”, given home sales have fallen 8.6% between April and May — a direct result of rising mortgage costs and inflation.

“We expect bearish sentiment to build and spread further as the Bank of Canada forges ahead with a ‘forceful’ monetary policy normalization,” wrote Senior Economist Robert Hogue. “We think this will set the stage for broad-based property depreciation in the period ahead.”

That mirrors today’s comments from Rogers, who also stated, “We are seeing moderation in the housing market… We know the parts of the economy that are most sensitive to interest rate changes are where Canadians borrow, that’s how monetary policy works, it works in bringing borrowing costs up. The demand economy is dependent on borrowing, you’ll see a quick reaction…”

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