MNI STATE OF PLAY: Canada Seen Hiking 75BPs To Highest G7 Rate

Canada's key interest rate is likely jumping to 2.25% from 1.5% Wednesday to briefly overtake the Federal Reserve's distinction of having the G7's highest benchmark, and Governor Tiff Macklem may also signal ongoing "forceful" action alongside new a forecast showing inflation well above target into 2024.

All but one of 19 economists surveyed by MNI see the rate climbing 75 basis points in the decision at 10am EST, the biggest move since hiking a full percentage point in 1998 in a failed bid to stabilize a weak dollar. RBC, UBS and JP Morgan say a bigger move can't be ruled out. Even getting to 2.25% would restore the highest rate since October 2008, a year when it was as high as 4.25%.

The Bank of Canada needs to signal further hikes this year because inflation has climbed even faster to a four-decade high of 7.7%, meaning policy in real terms has become even looser. Fed Chair Jerome Powell has said he could hike another 75 basis points at the next meeting July 27, and the BOE and ECB have also moved to tighten as inflation becomes the dominant global economic problem.

Macklem said after the last decision a 75bp move would be unusual while underlining the economy is beyond full capacity and can withstand higher rates. Officials have also said the danger of entrenched high inflation means a greater chance rates move higher than the 2%-3% neutral range.

INFLATION GETTING BLEAKER

Most reports since the June meeting paint an even bleaker inflation picture. The consumer price index will advance more than 3% over the next two years according to 78% of firms surveyed by the central bank, up from the prior record 70%. Core inflation rates preferred by the Bank have climbed from an average of 4.4% to a record 4.7%.

Senator Clement Gignac, who helps oversees the BOC through a parliamentary committee, told MNI Canada’s economy is hotter and needs even higher rates than the Fed this year. Gignac pointed to OECD forecasts showing Canada will lead the G7 in growth with 3.8% expansion versus 2.5% for the U.S.

That suggests Wednesday's statement will take a tone like the last one by removing most nuances around downside risks and loading in references to creeping inflation. While that may contrast with global bodies like the BIS warning about global recession or stagflation, Finance Minister Chrystia Freeland has also brushed off the idea Canada is at risk, using a recent speaking tour to tout strong growth and the BOC's track record of fighting inflation.

The rate decision comes with new quarterly forecasts and officials say they will once again be moving inflation numbers higher. The last Monetary Policy Report showed CPI of 5.3% this year, 2.8% next year and 2.1% in 2024. Economists currently see inflation of 6.7% this year and 3.3% in 2023.

"Inflation is clearly not letting up, and the Bank must demonstrate its resolve and move more aggressively," JP Morgan's Silvana Dimino wrote in a research note.

Investors see little chance the Bank gets more aggressive slimming down its balance sheet beyond the current stance of allowing maturing assets to roll off the books. The Bank's assets grew to CAD575 billion from CAD125 billion under Canada's first QE program, and Macklem has said the current QT stance would reduce the balance sheet 40% over two years.

Former Bank researchers tell MNI faster QT would be a good way to rein in hidden inflation coming from the jump in the money supply linked to pandemic stimulus, and rates could rise more than most investors predict.