By Julie Gordon

OTTAWA, (Reuters) – The Bank of Canada is likely to announce Wednesday its first half point interest rate increase in more than 20 years as it accelerates tightening its timeline for tackling an overheating economic environment, analysts stated.

Canada’s six most important banks foresee an increase of half-point to 1.0% (from 0.5%) when the central bank announces its rate decision at 10:00 a.m. ET (1300 GMT) is the preferred option to the standard quarter-point rise that the bank prefers. There is a roughly 85% chance that the increase will be greater in the money market.

“Inflation is running well above the BoC’s target, the economy has fully recovered pandemic losses, and the jobless rate is the lowest since at least the mid-1970s, leaving absolutely no rationale for monetary policy to still be stimulative,” said Benjamin Reitzes, Canadian rates & macro strategist at BMO Economics, in a note.

“It’s now that the BoC needs to catch up.”

In May 2000, the Bank of Canada hiked 50 basis points (bps).

Although the Bank indicated it would act “forcefully”, Governor Tiff Macklem left open the possibility of a 50-bps increase.

The Bank of Canada has a 1-3% inflation range. Inflation reached 5.7% in February for the 11th consecutive month. Last month, the Bank increased rates by 0.5% after lowering them from an all-time low of 0.25%.

With Canada’s major banks economists anticipating a second half point hike in June, the policy rate will become the primary lever to control inflation.

It is widely believed that the Bank will also begin quantitative tightening Wednesday. This would allow the vast majority of its government bonds, which it acquired during the pandemic, to be rolled off when they mature.

A reduction in the BoC’s share of the bond marketplace could help transmit monetary policies more efficiently to the economy. Borrowing costs are determined by long-term rates, rather than by the BoC’s very short-term rate.

Economists believe that the Bank of Canada will move aggressively because of the late start to tightening and the possibility of inflation expectations being uninhibited by the sharp rise in prices.

Stephen Brown of Capital Economics Canada, senior economist said that, unlike in the past where they tightened faster and went slower, now they tighten later but will probably go much quicker.”

    “What the topic is fast becoming now is where will rates end up,” he added. The money markets expect rates to peak at around 3% next year.