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  • Writer's pictureanalysiswatch

Title: Canada inflation could be at peak, but that's little relief for central bank

Apr 21, 2022 06:25AM ET

By: AnalysisWatch

Overall, Canadian inflation may have peaked after hitting a 31-year high in March, economists said, although the central bank still faces an uphill battle to bring skyrocketing prices back down to earth before expectations solidify.

Even if March's 6.7% is the peak and price increases slow next month, inflation will remain at levels last seen 30 years ago, and economists say the Bank of Canada will have to act aggressively to get back closer to its 2% target.

However, there is also the possibility that inflation could rise further, especially if Statistics Canada includes used car prices (a key driver of U.S. inflation) in its index and updates the weighting of its baskets in the coming months.

Based on the higher-than-expected March numbers, economists are calling for a second 50 basis point (bp) hike in the fed funds rate to 1.5% in June, with money markets betting on a total of 250 bps this year.

Some economists are already predicting a third 50 basis point hike in July, with Scotiabank expecting a 75-100 basis point increase in June or July. Normally, the central bank raises rates by only 25 basis points at a time.

In an interest rate decision last week, the Bank of Canada said it now expects inflation to average nearly 6% in the first half of this year, fall to 2.5% later in 2023 and then drop to 2% in 2024.

After doubling the policy rate to 1% in that decision, Bank of Canada Governor Tiff Macklem said the bank would continue to act "forcefully" when necessary.

Countries around the world are grappling with runaway inflation due to rising demand and constrained supply chains. Russia's invasion of Ukraine has added to the pressure, sending commodity prices sharply higher.

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