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Soaring Inflation Expectations Raise Odds of Super-Sized Bank of Canada Hike
The latest Business Outlook Survey from the Bank of Canada suggests that Canadians are becoming increasingly concerned about inflation. The survey, which polled over 2,000 Canadians, found that households expect inflation to remain high for a long time, with a significant majority attributing supply-chain issues as the main cause.
Inflation Expectations Unanchored
The survey also revealed that inflation expectations are becoming unanchored, which could prompt Bank of Canada Governor Tiff Macklem to take more drastic measures to control inflation. In fact, many business leaders who responded to the survey suggested that higher interest rates, more fluid supply chains, lower oil prices, and an end to the war in Ukraine would be necessary to get price pressures under control.
Interest Rate Hike on the Horizon
Considering these findings, it’s likely that the Bank of Canada will increase its benchmark interest rate by a full percentage point when it updates policy on July 13. This would be a significant move, as the central bank typically adjusts rates in quarter-point increments.
Macklem’s Soft Landing Plan
Bank of Canada Governor Tiff Macklem has stated that he thinks he can engineer a soft landing for the economy, which means achieving low inflation without triggering a recession. However, the Business Outlook Survey suggests that this may not be necessary. In fact, many business leaders seem to welcome the idea of a recession as a way to get inflation back under control.
Conclusion
The survey’s findings suggest that Canadians are becoming increasingly concerned about inflation and are willing to accept more drastic measures to control it. With inflation expectations unanchored and interest rates likely to rise, it’s clear that the Bank of Canada is facing a significant challenge in its efforts to maintain price stability.
Key points:
- Inflation expectations are becoming unanchored, with households expecting high inflation for a long time
- Business leaders suggest that higher interest rates, more fluid supply chains, lower oil prices, and an end to the war in Ukraine would be necessary to control inflation
- The Bank of Canada is likely to increase its benchmark interest rate by a full percentage point when it updates policy on July 13
- Governor Tiff Macklem’s soft landing plan may not be necessary, as many business leaders welcome the idea of a recession as a way to get inflation back under control.
