By Julie Gordon

OTTAWA, Reuters – On Wednesday, the Bank of Canada will raise its overnight key interest rate by 1%. This is the latest in a series of rises that aim to curb inflation while Russia invades Ukraine.

Reuters polled 25 experts and found that they expect Canada’s central banks to raise rates by 0.50%, compared to the record-low 0.25%. The decision will be made at 10:00 a.m. ET (1500 GMT). Last time it raised rates was October 2018. Then, in March 2020 the COVID-19 pandemic hit, the rate was slashed by three times.

Markets were surprised when the Bank held rates in January, even though the Bank said that the economy had generally recovered. The Bank instead took a more cautious approach, formally abandoning its promise to keep rates low, and signaling clearly that increases would be coming.

“The Bank of Canada is very clear about what to expect. “They’ve been saying rates are heading higher,” stated Royce Mendes (head of macro strategy, Desjardins Group). He anticipates that there will be back-to-back increases in March and April.

Mendes believes that there is no way for the Ukraine conflict to affect it, especially as Canada is experiencing stronger economic growth than anticipated and rising oil prices expected to drive already high inflation levels above those forecasted in the quarter.

Mendes stated that “this is happening at a moment when the Bank of Canada has already expressed concern about inflation expectations being unstable.”

Canada’s February inflation rate reached 5.1%. It was its highest since September 1991. In addition, it is now its 10th consecutive monthly high above the Bank of Canada’s range of 1%-to-3%. Tim Lane, the Deputy Governor, stated last month that Canada’s Bank of Canada would “forcefully” move.

Investors bet on the central banks starting with a initial 50 basis-point rise. With Russia’s aggression on Ukraine, markets see only 25 basis points this month. There could be six more hikes in 2022, back to the pre-pandemic level of 1.75%. [BOCWATCH]

The Bank of Canada’s balance sheet is where it could be surprising markets. According to the Bank of Canada, its balance sheet was stable in January.

However, some economists believe it may have already indicated an earlier start.

Stephen Brown from Capital Economics pointed out that Deputy Governor Lane said last month that quantitative tightening will begin as soon as rates rise and that more information would be available at the March bank decision.

Brown said that it could have been a slip of the tongue. It would surprise me to hear him say that, even if the bank had not already talked about something like that.