Canada’s annual inflation rate came in hot once again in September, and Scotiabank economist Derek Holt sees the Bank of Canada responding with a series of rate hikes beginning next year.
“This isn’t transitory at all in my opinion,” said Holt, head of capital markets economics at Scotiabank, in an interview. “When it’s your home and your grocery bill and your car among the leading categories in terms of year-over-year contributions to this inflation picture, it suggests it’s broadly based.”
“It’s not just a story about the re-emergence out of lockdown and into a reopening economy, this is something that’s a little more disturbing than that.”
His comments come on the heels of Statistics Canada revealing an annual rate of inflation of 4.4 per cent for September, the fastest rate since 2003, marking back-to-back months consumer prices have doubled the Bank of Canada’s two per cent target.
Holt doesn’t see it ending there, predicting inflation readings approaching five per cent by the end of the year, which would be the biggest overshoot to the central bank’s target since 1991.
Holt said he expects the bank will “fight” some expectation in the market that rate hikes could be in the offing as early as the spring, but that the benchmark interest rate will start to raise later next year.
“Once they start going, we’re of the conviction that the Bank of Canada is going to hike four times in the second half of next year, and four more times in 2023, taking the policy right up to 2.25 per cent by the time they’re done,” he said.
The cost of borrowing in Canada was slashed rapidly at the onset of the COVID-19 pandemic, down to the historic low rate of 0.25 per cent, where it has remained ever since.
Since then, concerns have been mounting about consumer prices that are increasing too rapidly, far outpacing wage increases. Bank of Canada Governor Tiff Macklem and his U.S. counterpart, Federal Reserve Chair Jerome Powell, have repeatedly dismissed these inflation figures as transitory, meaning only temporary.
Holt disagrees, and thinks monetary policy decision makers need to react fast to stave off problems further along in the recovery.
“The longer we wait to wrestle some inflation figures to the ground, the greater the risk that we’re pulling forward demand by overheating circumstances,” he said. “Bear in mind, you only get supply chain problems if you’re overheating the demand side to begin with.”
“If the bank doesn’t take steps in order to tighten policy and head off those building inflationary pressures we see right now, we could be looking at runaway imbalances in the economy that they would have to react a little bit too abruptly to later on, in a way that jeopardizes the cycle.”
But Holt’s call for four hikes next year and in 2023 isn’t a Bay Street consensus.
BMO Asset Management Chief Investment Officer Sadiq Adatia said he doesn’t think the Bank of Canada will jump that far ahead of the U.S. central bank.
“Well I do expect to see the Bank of Canada probably go earlier than the Fed in terms of interest rates hikes but I don’t expect to see four next year by any means,” he said in an interview Wednesday afternoon.
“I don’t think the Bank of Canada wants to go that far ahead of the Fed. So, I do expect at least one, maybe two rate hikes next year but definitely not four.”
