Bank of Canada Has A Solid Case To Double Interest Rates Next Meeting: Scotiabank

Canadian inflation is hitting multi-decade highs and is projected to get worse. Derek Holt, Scotiabank’s head of Capital Markets Economics, argues the pace of inflation will force interest rates to double by the summer. The Bank of Canada (BoC) is now so behind controlling inflation that raising the overnight rate by an entire point at the next meeting is now justified. 

The Bank of Canada Should Hike Rates 100 BPS In June

The bank is forecasting a monster climb for interest rates soon. They see the BOC raising the overnight rate at least a 50 basis point (bp) at the next meeting in June. However, Scotiabank sees the case for an even more significant hike in the current environment. 

“There is even a solid case for the BoC to hike by 75–100bps in one shot,” said Holt. 

Canadian Inflation Is The Highest In 3 Decades and Expected To Go Higher

The aggressive interest rate hikes are to cool Canada’s out-of-control inflation. As mentioned earlier today, annual headline inflation reached 6.7% for March, the fastest growth since January 1991. It’s being dismissed as a potential peak for CPI growth by some experts, but that’s not the way Scotiabank sees it. 

The bank notes Statistics Canada (Stat Can) will be adding used vehicle prices to the CPI Index next month. With used vehicle prices now up 45% in the US, the inclusion can push Canadian CPI higher. 

“That will likely pop inflation over 8% y/y when they do so and return inflation to highs last seen in the early 1980s. When they add used vehicles, it will be the final blow to the long false argument that Canada has been managing inflation better than the US and other countries because of a lower official inflation rate. That was only ever due to mismeasurement,” he said. 

The economist has been a notable critic of the transitory inflation narrative. Scotiabank was one of the earliest critics to point out inflation problems were becoming broad and didn’t look transitory almost a year ago. They’ve also criticized how Canada measures inflation, sometimes even referring to the numbers as “fakeflation.” 

The Bank of Canada Is Behind The Inflation Curve

The bank argues the BOC is behind the curve and should accelerate rate hikes. “Monetary policy tailored to current conditions should already be at neutral—if not above— given where inflation is and with a full employment recovery as the economy has moved into excess aggregate demand,” he said. 

Adding, “having failed to deliver that outcome, the second-best option would be to get to the mid-point of the 2–3% neutral rate range this summer and preferably by July in my view.” 

A 2% interest rate would be higher than the previous peak at the start of 2020. It’s also not as outrageous as it might sound, since achieving a 2% interest rate could be done with two 50 bps hikes over the next two meetings, which is a fairly common call amongst the economists.

The argument for doing one big hike also isn’t that far-fetched of a plan. Would waiting one month help preserve consumption more than high inflation would reduce it over an extra month? Treating it like a band aid and just ripping it off to minimize the length of pain makes a lot of sense this far behind the curve.