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Market News Inflation rate has soared more than 400% in two years, the Bank of Canada is expected to continue to "violently raise interest rates"

Inflation rate has soared more than 400% in two years, the Bank of Canada is expected to continue to "violently raise interest rates"

Bank of Canada Deputy Governor Toni Gravelle reinforced his view of continuing rate hikes, saying borrowing costs would need to rise quickly to more normal levels to bring inflation back to target and that the current 1 per cent policy rate is "too stimulatory." In the face of soaring inflation, the Bank of Canada's "violent interest rate hike" may have been inevitable.

2022-05-20
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The pressure on the Bank of Canada to aggressively raise interest rates is intensifying as stubborn inflation “fever”.

Statistics Canada recently released data showing that the CPI surged 6.8% year-on-year in April, the highest level since 1991 and higher than the 6.7% expected by economists. Although the main reason for pushing up the CPI is food, housing and other fields, it is worth noting that inflation has penetrated into all aspects, and the prices of almost everything have continued to rise.


Meanwhile, Toni Gravelle, deputy governor of the Bank of Canada, firmed up his view of continuing rate hikes, saying borrowing costs need to rise quickly to more normal levels to bring inflation back to target, with the current 1 per cent policy rate "too stimulatory" ".

In the face of soaring inflation, the Bank of Canada's "violent interest rate hike" may have been inevitable.

Inflation soars more than 400% in two years

In April 2020, the Canadian CPI was only 1.3%, and in April 2021, it has soared to 3.4%, and in April this year, it doubled again to 6.8%. In just two years, Canadian inflation has soared by more than 400%.

Wang Xinjie, chief investment strategist of Standard Chartered's China Wealth Management Department, told reporters that in the latest April inflation data, food and housing were the ones that exceeded expectations by a large margin, and energy declined somewhat month-on-month. In the face of high inflation not seen in decades, the Bank of Canada needs to implement relatively tight policy.

Wang Youxin, a senior researcher at the Bank of China Research Institute, told reporters that due to geopolitical conflicts and other factors, the rapid rise in international commodity prices has driven Canada's domestic inflation to rise rapidly, making economic recovery more difficult, and at the same time increasing the cost of living for consumers. In order to prevent inflation from continuing to rise, the Bank of Canada will continue to vigorously raise interest rates.

It should be noted that although Canada, the United States and other places are facing high inflation, their specific economic structures are not the same. As a major exporter of commodities, Canada has a natural advantage.

In Wang Xinjie's view, Canada itself is an important exporter of energy and food. Under the long-term geopolitical conflict, Canada is relatively more flexible in dealing with energy and food price inflation. From the data point of view, energy and food are important components of the inflation weight, accounting for about 23% of the Canadian inflation survey.

At the same time, once the global commodity prices fall in the future, the impact on each country will be different. Wang Xinjie said that Canada's merchandise exports accounted for 26% of GDP, most of which came from bulk commodity exports, while this proportion was less than 8% in the United States. If oil prices drop in the future, it will be a big positive for energy importing countries. But for Canada, a major exporter of commodities, falling prices can curb inflation on the one hand, but on the other hand, it will drag down the Canadian economy and even the Canadian dollar to a certain extent.

In general, under the influence of multiple factors such as geopolitical conflicts and the epidemic, the "high fever" of inflation will remain for a long time. Douglas Porter, chief economist at Bank of Montreal, predicts that inflation is spreading more widely and will be difficult to unwind. The worst is yet to come, with Canadian inflation still set to exceed 6 per cent by the end of the year.

"Violent rate hike" is hard to stop

On April 13, the Bank of Canada made a heavy attack, raising interest rates by 50 basis points, doubling the benchmark interest rate from 0.5% to 1%.

Given that inflation is still high, the Bank of Canada will likely continue to "violently raise interest rates" next. Wang Xinjie predicts that after the last time the Bank of Canada raised interest rates by 50 basis points, the expectations for another 50 basis points of interest rate hike at the next meeting on interest rates have risen sharply.

In the future, the Bank of Canada may even raise interest rates by 75 basis points at a time. Bank of Canada Governor Tiff Macklem (Tiff Macklem) said that the Bank of Canada is working hard to bring down the inflation rate from the high level, and borrowing costs may increase significantly in the future, and the possibility of a future interest rate hike of 75 basis points cannot be ruled out. sex.

It should be noted that the Bank of Canada has raised its neutral interest rate forecast to a range of 2%-3% in April, and it is unclear whether it will continue to raise interest rates after reaching the neutral rate. Some analysts pointed out that some economic factors may cause the Bank of Canada to suspend interest rate hikes after reaching the neutral rate, and the most prominent factor may be real estate.

Regarding the importance of real estate, Wang Xinjie said that real estate occupies an important position in Canada's inflation and economy, accounting for 30.03% of inflation, and the proportion of housing-related industries exceeds 15% of GDP. After the big release of water since the epidemic in 2020, the disposable income of residents has increased, and then there has been a pursuit of anti-inflation assets.

The interest rate hike will undoubtedly drag down the performance of the Canadian real estate industry. Wang Youxin told reporters that raising interest rates will have a negative impact on the real estate market. The Canadian economy is highly dependent on real estate. With the increase in interest rates, the growth rate of investment and sales in the real estate market will slow down. But on the other hand, considering that Canada is a major exporter of minerals and fuels, as commodity prices rise, it will have a positive impact on the exports and sales of related industries, which will offset the negative impact of interest rate hikes to a certain extent. Overall, the Canadian economy will remain relatively stable, with GDP growth this year expected to be slightly lower than in 2021, and better than other developed economies.

How to choose between controlling inflation and stabilizing growth? This is the biggest problem facing central banks at present, and the specific monetary policy in the future will depend on economic data. Wang Xinjie said that the common practice of various countries is to fight inflation by tightening monetary policy. Although it may "choke the throat of the economy", the risk of inflation is more serious than concerns about economic growth. If you're lucky enough to keep inflation in check without a sharp downturn in economic growth, then a "soft landing" has been achieved.

However, as the global economic growth continues to slow down, the risk that the future economic recession will come earlier than the inflation turning point cannot be ignored. Wang Xinjie analyzed that from historical experience, economic recession itself can curb inflation. Similar to the second half of 2018, after the economic recession caused by tightening policies, inflation naturally declined. Monetary policy then began to ease in 2019, a "Volcker moment"-like approach, with tightening to address inflation and easing to address economic growth.

Article source: 21st Century Business Herald
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