Inflation continued to heat up in March, raising market expectations for future Bank of Canada rate hikes.

Headline consumer price inflation topped an annual rate of 6.7% last month, up from 5.7% and above expectations for a 6.1% reading, according to data from Statistics Canada. This is the highest reading since January 1991.

The largest price gains were in energy (27.8% vs. 24.1% in February), gasoline (39.8% vs. 32.3% in February) and food, which hit 7.7%—its highest rate in over a decade.

The average of the Bank’s three preferred measures of underlying core inflation, which exclude volatile goods, rose to 3.8% in March, up from 3.5% previously.

The rate outlook

Following the release of the latest inflation figures, the bond market upped its rate-hike expectations, pricing in another 175+ bps of hikes by the December 7 Bank of Canada meeting.

That would take the Bank’s benchmark rate up to 2.75%, and could result in a prime rate of 4.95%, a level not seen since 2008.

“The fact that inflation is running amok should drive a minimum 50bps hike that we forecast at the next meeting in June,” wrote Scotiabank economist Derek Holt. “I had previously argued they should deliver a series of three 50bps moves. There is even a solid case for the BoC to hike by 75–100bps in one shot.”

Holt argues that inflation could actually top 8% once Statistics Canada adds used vehicle prices to the CPI index, which is expected in next month’s report.

“The obstacle is that the BoC has been dragging it every step of the way, which is a big part of the reason behind how we got inflation numbers like these,” Holt said. “Monetary policy tailored to current conditions should already be at neutral—if not above— given where inflation is and with a full employment recovery…”

Economists at National Bank of Canada believe the BoC will once again have to revise its inflation forecast higher in July. They also say it’s not clear how the Bank could justify not implementing another 50bps hike at its June meeting.

“We’d go as far to say that a report like this argues for inter-meeting action just to try to get back in front of expectations, to the extent still possible,” they wrote. “That’s not going to materialize in our view, but clearly today’s report endorses urgent and aggressive action.”

While the NBC economists don’t agree with the market view of a policy rate above 3%, they do say “the path to 2.0%-2.5% “clearly needs to be steeper.”

“2% by July? With inflation this pervasive, such aggressive action looks increasingly warranted,” they said.

Bank of Canada inflation interest rates rate hikes

Last modified: April 28, 2022