ICYMI: Soaring inflation expectations raise odds of super-sized Bank of Canada hike — via financialpost inflation Economy
There’s some evidence now that inflation expectations are becoming unanchored, which could prompt Bank of Canada Governor Tiff Macklem to attempt a bigger bang in order to show skeptical Canadians that he’s serious about wrestling inflation back to the two-per-cent target, even if many of the forces putting upward pressure on prices are beyond his control.
In the United States, the Federal Reserve, which is facing even hotter inflation, increased its benchmark interest rate three quarters of a percentage point, an outsized move that underlined the worry that central bankers are losing their grip on inflation expectations. Expect the Bank of Canada to do the same when it updates policy on July 13. It could even choose to go a full percentage point.
Too radical, considering the Bank of Canada prefers adjusting interest rates in quarter-point increments? Consider what the business leaders who responded to the latest survey said would have to happen to get price pressures under control: higher interest rates, more fluid supply chains, lower oil prices, and the end of the war in Ukraine. The central bank controls only one of those factors.
“Some firms noted that an eventual recession, which they often attributed to higher interest rates, would support or be needed for a return of inflation to two per cent,” the report said. “A few businesses also said that labour costs are contributing to rising inflation and that increased immigration or a slowing economy would be necessary to reduce wage pressures.”
Macklem has said he thinks he can engineer a soft landing. The message from the Business Outlook Survey is that he needn’t overthink it. A growing number of Canadians want prices back on the ground, and if that requires a thud, so be it.
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