There may have been a sense of calm earlier this year when the Bank of Canada paused its rate increases in March and April, but one prominent economist says the bank must get back into a raise-the-rate mood at its next announcement on June 7, and possibly again in July..The bank has targetted an inflation rate of between 2% and 3% and at its last meeting said it expected to reach 3% sometime this year, and then 2% in early 2024, based on inflation falling from a record high of 8.1% last summer to 4.3% in March..But April’s rate of 4.4% surprised market watchers, most of whom expected a decline to 4.1%.In a note distributed on Wednesday, Derek Holt of Scotiabank, said don’t be surprised if the bank returns to aggressive hikes.. “Recall (the bank) surprised markets three of eight decisions last year. They couldn’t care less about what markets and the street expect and I swear they wear that as a bit of a mischievous badge of honour,” wrote Holt..“Even if they do think they need to set it up then they can easily point to everything they said in the April statement, "Governing Council continues to assess whether monetary policy is sufficiently restrictive to relieve price pressures and remains prepared to raise the policy rate further if needed to return inflation to the 2% target." .At the June and July meetings Holt wrote bank governor Tim Macklem could say, “I told you I'd hike if we're surprised. And my, what a surprise (inflation) and housing have been to them!”.Holt said there is a debate about crushing inflation now versus later..“The way I settle that is by portraying the challenge of getting inflation under control as a race against the clock. The longer that consumers, businesses, governments and markets see core inflation being persistent if not reaccelerating, the less confidence they have that the (bank) will ever achieve its 2% inflation target,” he wrote..“It has already gone on too long. We already have survey-based evidence of that from the (bank’s) twin consumer and business surveys plus recent collective bargaining agreements that show no one really believes in 2% for years to come.”.“If the (bank) doesn’t adopt the crush it, killer mentality, then it may never succeed in getting inflation down to 2%. A pledge to hang out high for longer doesn’t address this problem and nobody would believe it anyway given a heavy discount attached to forecast credibility the further out in time we go.”.On the other side of the raise-the-rate debate is economist Sherry Cooper, saying April’s inflation number shows the road to the central bank’s 2% target will not be free of potholes..“The initial reduction in inflation was swift and relatively straightforward, but predictably, the following phase is proving to be considerably more challenging,” Cooper said in a new analysis..“This sketches an unusual scenario for the Bank of Canada as it approaches its June 7 rate decision. The economy remains resilient, with Canadians grappling with escalated interest rates and continued price pressures. Spring 2023 increasingly looks like the turnaround point for Canada’s housing market after a year-long slump, and labour markets remained firm in April.”.Cooper thinks these trends will give the bank confidence in its current strategy..“The bank will be content that their measures of core inflation continue to trend downward,” said Cooper. “The bank will likely continue the pause in June, but if the May employment numbers continue strong, the Governing Council will indeed warn that they will remain ever vigilant. I do not expect rate cuts this year.”
