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RBC See Aggressive Hikes On Inflation Expectation Fears

BOC
  • RBC, along with markets, expect a 75bp hike from the BoC as the economic growth risks from hiking too aggressively in the near-term will be overshadowed by the medium-term cost of not doing enough.
  • CPI inflation of 7.7% Y/Y in May was well above the Bank’s April forecast of 5.8% in Q2 and 60% of the basket is growing faster than the 3% upper target rate.
  • These higher readings are beginning to seep into longer run inflation expectations, with a growing share of businesses and consumers expecting elevated inflation for more than 2-3 years.
  • An unhinging of longer-run inflation expectations from the BoC’s targets would disrupt decades of effective inflation-targeting monetary policy and require much larger and more damaging hikes to reverse.
  • They continue to believe inflation is close to its peak, but won’t shift to more sustainable levels until demand slows more significantly. The BoC and other central banks will have to push rates lower, but this likely won’t play out until the economy undergoes a modest contraction next year.
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