Although the situation remains very fluid, I believe Bank of Canada’s credibility is at stake, and thus the bank will feel compelled to raise its policy rate next month. I can think of three main reasons for the bank to do so. Opinion by Gustavo Indart
After eight consecutive increases, the Bank of Canada decided to take a pause this month and held its key rate unchanged at 4.5 per cent, its highest level since July 2007. The bank’s decision was consistent with market expectations and arguably justified by the continuous decline in year-over-year inflation since peaking at 8.1 per cent in June of last year.
Despite the economy showing great resilience and labour markets remaining tight, many economists and financiers believe the bank will hold the policy rate unchanged in its next announcement on April 12. This view has become even more prevalent after the failure ofI am, however, among the shrinking minority who thinks otherwise.
Actually, the Canadian dollar already depreciated about three per cent with respect to the U.S. dollar since early February, and a bit less with respect to the euro and the British pound. Hence, keeping the bank’s key rate unchanged when other central banks may continue raising theirs will result in an acceleration of inflation — something the bank is determined to prevent.Secondly, while year-over-year inflation was 6.
And this is what the January data suggests. Although year-over-year inflation fell to 5.9 in January, on a month-on-month basis the price index rose at a rapid annualized rate of 6.5 per cent — mostly due to price increases in food and gasoline. Indeed, excluding food and energy, the average price climbed at a moderate annualized rate of only 2.5 per cent.
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