Shrutee Sarkar

BENGALURU (Reuters – The Bank of Canada is expected to raise its overnight interest rates by 50 basis point at its next policy meeting, which will be held on April 13. This decision was based on a majority of economists polled for Reuters. They also raised their inflation forecasts this year.

In order to manage rising inflation caused by disruptions in supply chains and increased energy prices fueled by war between Russia and Ukraine, the central bank will likely raise rates faster than expected in the coming months.

The central bank raised rates 25 basis points to 0.500% in March, marking the first rate hike since October 2018. This was due to the strong recovery of the economy from the COVID-19 pandemic. It is expected that it will follow this up by increasing its base points 50 times.

In the poll, 18 percent of the economists surveyed wanted a 50 basis-point increase this month. These include the five most important banks in Canada – BMO and CIBC as well National Bank.

The five largest banks expect another half point rate hike at the June meeting. But, the majority of poll respondents expect rates to rise by quarter points each month. This would bring rates to 2.00% in 2022.

The overnight interest rate is even more high, with 2.75% at the end of year according to futures pricing.

After Sharon Kozicki, BoC’s Deputy Governor, stated late last month that the bank is ready to “forcefully” raise rates to bring inflation back to its target, the expectation for an even larger April move has changed.

This coincides also with an increase in the expectations of half-point moves by its bigger neighbor, U.S. Federal Reserve. This would make April the BoC’s 50th basis point rise since May 2000, if it is realized.

“Given they (the BoC are already behind the curve in tightening, and that inflation is well over their 2% target,” stated Benjamin Reitzes of BMO Capital Markets.

The poll showed that the BoC would raise rates by 2.25% in Q2 2023, and then stop at the end of 2023.

Canada’s inflation rate was forecast to average 5.6% and 5.9% last quarter. Then, it will ease to 5.0% in the next two quarterly, followed by 4.4% and 4.4%. That is a marked improvement on 4.5%, 4.1% 3, 2.2%, 3.2% and 2.5% that were predicted three months earlier.

Although inflation is expected to drop significantly in the next year, it will still be above the target of central banks until at least 2024.

According to a regular BoC survey, a record amount of Canadian businesses are facing severe capacity constraints due to intense supply chain problems and labor shortages.

Seasonally adjusted, and annually, the economy is expected to expand 4.3% in this quarter. This was lower than the 6.0% predicted for January. The economy was forecast to grow 3.5% and 3.1% respectively in the next quarters, as opposed with 4.7% or 3.5%.

(To see more stories, go to the Reuters long-term global economic outlook polls package.

Shrutee Skarkar reports and polls; Ross Finley edits.