MNI BOC WATCH: Macklem Seen Hiking Rate To Fresh 2001 High

The Bank of Canada looks set to deliver another quarter point interest rate hike Wednesday after recognizing last month that inflation was persistent enough to warrant a resumption of rate increases after a two-meeting pause.

There's almost no way the BOC ended its rate pause last month for a one-off hike. Twenty economists surveyed by MNI see the target rate for overnight loans between commercial banks rising another quarter point to 5%, the highest since 2001 and the 10th rate tightening in this cycle. (See MNI INTERVIEW: BOC Hike Is A Precusor For More)

Governor Tiff Macklem's emphasis on upside risks to inflation have since been corroborated by a string of robust data. CIBC and JP Morgan switched to call for a hike Friday after employment rose 59,900 last month to triple the consensus forecast, leaving just two economists predicting unchanged rates.

Canada's entire net job gain came from higher-paying full-time positions that rose 109,600, while part-time work declined, signaling employers are trying harder to hold on to their workers. Average hourly wages rose 4.2% in June from a year ago, and while that's the slowest since May 2022 officials say wage gains must be slower to achieve price stability.

HOT INFLATION SEEN PERSISTING

Consumer price inflation has slowed to 3.4% in May from a four-decade high of 8.1% last June but Bank officials are more concerned about having overshot the official 2% target for so long -- since March of 2021.

Two-thirds of executives continue to see inflation running faster than 3% over the next two years, the Bank's latest quarterly survey shows. Households saw inflation at 5.1% in a year and 3.9% in two years.

Economists generally see the Bank’s lending rate peaking at 5% and staying there for the rest of this year. Officials in the past have spoken about the potential for higher-for-longer type of policy but it’s unclear that will appear in Wednesday’s statement. The Bank will also be reluctant to add language about another pause even if that's their intention.

“Barring another burst of strength in the economic data, the BoC will likely pause for an extended period thereafter. However, the risks remain skewed to further hikes through at least the rest of this year,” Bank of Montreal’s Benjamin Reitzes wrote in a research note.

STILL NOT RESTRICTIVE ENOUGH?

Governor Macklem could reassert the idea of high-for-long rates at his press conference an hour after the 10am rate decision, and the Bank could underline the economy's momentum in the quarterly Monetary Policy Report.

Still, a surprise pause Wednesday cannot be completely ruled out from a central bank with five unexpected actions since the start of last year. That would require explaining away an economy officials have said was working above potential and continues to generate positive surprises.

Canada's resilience continues even after last July’s shock 100bp rate hike that by now should have created a major drag on spending. Recent GDP reports instead show increased appetite for big-ticket items like houses, furniture and cars.

After delaying the start of rate hikes following the early rebound from the pandemic, the Bank's meeting minutes released two weeks after the June 7 rate hike showed officials discussed "the need to be forward-looking and not wait too long to ensure that monetary policy was restrictive enough."