MNI STATE OF PLAY: Canada Likely Raising 50BPs, Signaling More

The Bank of Canada will likely raise its overnight policy rate half a percentage point to 1.5% June 1 and signal a similar move for the July meeting, taking borrowing costs toward neutral amid what may soon be the fastest inflation since the 1980s.

Governor Tiff Macklem hiked 50bps in April and has said he'll be forceful if needed, while adding that going any faster would be unusual. The Bank last tightened half a point in 2000 and hasn't done more since raising a full percentage point in 1998.

Former Governors David Dodge and Stephen Poloz have told MNI the BOC needs to move to at least neutral as a show of resolve in the face of unstable price expectations. Current Bank officials estimate a neutral rate around 2.5% and have said they aren't on autopilot so they could pause around there or go further depending on factors such as how indebted consumers react. The Bank may also need to hike more to counteract fiscal stimulus in a hot economy, according to TD Bank and former BOC advisers.

For now inflation is the dominant concern, with the risk of a recession downplayed amid record low unemployment. Consumer prices climbed 6.8% in April from a year ago and Deputy Toni Gravelle in a recent speech said the strength of recent figures meant the Bank would once again be raising near-term inflation forecasts.

MORE COMING IN JULY

The BOC has already said inflation will average almost 6% in the first half of the year, triple its 2% objective. Inflation will remain near the top of the Bank's 1%-3% target band next year at 2.8% and won't return to 2% until sometime in 2024, policymakers predict.

All 20 economists polled by MNI see the overnight rate moving to 1.5% on Wednesday. While a few see a small risk of a 75bp move , the consensus is to spread the moves out with another 50bps at the following meeting and more tightening later this year.

The last big piece of data on first-quarter GDP comes out Tuesday morning, likely too late for Governor Tiff Macklem to change course. If anything, Statistics Canada's flash estimate for Q1 output growing 1.4% signaled more strength than the Bank's earlier forecast, which already said the economy was moving beyond full capacity.

The decision comes with a one-page statement Wednesday at 10am EST, and a speech and press conference on Thursday.