Consumer inflation expectations surged in Canada, hitting fresh highs in the short-term and up “significantly” over the long-term. A Bank of Canada survey showed Monday, bolstering calls for a very rare 75-basis point rate increase.
The surveys both reinforce calls for a 75-bp rate increase at the Bank of Canada’s next decision on July 13. That would be the largest hike since August 1998, when the bank lifted rates by 100-bp to defend the currency. In particular, long-term (consumer) inflation expectations increased dramatically,” said Andrew Grantham, senior economist at CIBC Capital Markets. In a note, adding the across-the-board jumps were “not good news” for the central bank.
Canada’s inflation rate hit a near 40-year high at 7.7% in May and prices are set to go higher before easing later this year. The bank has signaled it is willing to act aggressively to keep price increases from becoming entrenched.
What central banks dread is a situation in which price increases become self-fulfilling expectations for higher prices. This could cause people to raise wage demands and accelerate purchases, driving further price increases.
The Canadian dollar was trading 0.1% lower at 1.2890 to the greenback, or 77.58 U.S. cents. Money markets are betting the policy rate will hit 3.25% to 3.5% by year-end. Which is up from a record low 0.25% at the start of 2022.
-Reuters
