Bank of Canada expected to hike rate on Wednesday to stem spillover of energy inflation
By Promit Mukherjee
OTTAWA, Oct 26 (Reuters) - The Bank of Canada will likely raise its benchmark interest rate by 25 basis points on Wednesday as a pre-emptive move to stop energy-led inflation from spreading
to the rest of the economy, according to money markets and economists.
A hike would raise borrowing costs for consumers and could weigh on a weakening economy. But it would also show how worried policymakers are that higher energy costs will spill into food and housing prices, economists said.
A rate increase would be the first since July 2023 and the first change in the bank’s policy rate in a year.
Earlier this month at International Monetary Fund meetings in Bangkok, BoC Governor Tiff Macklem signaled the bank was ready to act if inflation stays high. The BoC's business and consumer surveys, released after his comments, showed inflationary concerns.
"The governor has made the point many times that their inflation concerns rise the longer energy prices stay high. And I think it's probably just gone beyond the comfort zone for the Bank of Canada," said Doug Porter, chief economist at BMO Financial Group.
Porter said while he was not in favor of a hike due to weaker economic conditions, the central bank's messaging indicates a rate increase.
OIL SPIKE NOT SPREADING THROUGH ECONOMY
To be sure, a broad set of data in the last few weeks has not shown that higher crude oil prices, which have pulled up gasoline and diesel prices, are trickling into food prices or costs of other items.
Annual inflation rose to 3.1% in September, driven almost entirely by energy, while core measures, which strip out volatile components, eased below 2%, the midpoint of the bank’s 1% to 3% target range. Data on housing, manufacturing and wholesale trade indicate third-quarter economic growth will likely be substantially lower than the second quarter. The US plans to impose higher tariffs in January on some Canadian products, such as autos, auto parts and steel.
The last two job reports have been weak, wiping out any employment gains this year.
Two-year Canadian government bond yields have risen more than 22 basis points since the central bank's last meeting in September.
"Higher oil prices are going to start to administer pain on the price of (everything) pretty much across the board," said Pedro Antunes, chief economist at Signal49 Research, an independent economic research firm, adding that it is that knock-on effect the bank is trying to prevent.
"I think they want to talk tough and make sure that ... (inflation) expectations are rooted," Antunes said.
Money markets are pricing in a 25-basis-point hike on Wednesday, which will take the overnight rate to 2.5%.
Nineteen of 34 economists surveyed by Reuters October 21-23 said the BoC will hike its overnight rate by a quarter percentage point on Wednesday to 2.50%. A majority also forecast one more rise before March.
The BoC will announce its monetary policy decision on Wednesday at 9:45 a.m. ET (1345 GMT). It will also release the quarterly Monetary Policy Report, where it is expected to substantially revise its inflation forecast for the coming year.
The US Federal Reserve will also announce its monetary policy decision on Wednesday. It is largely expected to hold rates at the current level.
(Reporting by Promit MukherjeeEditing by Rod Nickel)