Inflation has soared by more than 400% in two years, and the Bank of Canada is expected to continue to "raise interest rates violently"

With stubborn inflation "high fever is difficult to retreat", the pressure of the Bank of Canada to raise interest rates aggressively is further intensifying.

Statistics Canada recently released data showing that CPI surged 6.8% year-on-year in April, a new high since 1991 and higher than the 6.7% expected by economists.

Although the main reasons for pushing up CPI are food, housing and other fields, it is worth noting that inflation has penetrated into all aspects, and the prices of almost everything continue to rise.

At the same time, Toni Gravelle, deputy governor of the Bank of Canada, confirmed the view of continuing to raise interest rates, saying that borrowing costs need to rise rapidly to a more normal level,

Thus, inflation will return to the target. The current policy interest rate of 1% is "too stimulating".

In the face of soaring inflation, the Bank of Canada's "violent interest rate hike" may be inevitable.

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The inflation rate soared by more than 400% in two years

In April 2020, the CPI of Canada was only 1.3%, but by April 2021, it had soared to 3.4%, and in April this year, it doubled again to 6.8%. In just two years, Canada's inflation rate has soared by more than 400%.

Wang Xinjie, chief investment strategist of Standard Chartered China wealth management department, told reporters that in the latest inflation data in April, food and housing significantly exceeded expectations, and there was some decline in energy. In the face of high inflation, which has not been seen in decades, the Bank of Canada needs to implement a relatively tight policy.

Wang Youxin, a senior researcher at the Bank of China Research Institute, told reporters that due to geopolitical conflicts and other factors, international commodity prices have risen rapidly, driving Canada's domestic inflation to rise rapidly, raising the difficulty of economic recovery and the cost of living of consumers.

In order to prevent inflation from continuing to rise, the Bank of Canada will continue to vigorously raise interest rates.

It should be noted that although Canada, the United States and other places are facing high inflation, the specific economic structure is different. As a major commodity exporter, Canada has natural advantages.

In Wang Xinjie's view, Canada itself is an important exporter of energy and food. Under the long-term geographical conflict, Canada has relatively large flexibility to deal with energy and food price inflation.

In terms of data, energy and food are important components of inflation weight, accounting for about 23% of Canada's inflation survey.

At the same time, once the global commodity prices fall in the future, the impact on countries will be different. Wang Xinjie said that Canadian commodity exports accounted for 26% of GDP, most of which came from bulk commodity exports, while this proportion was less than 8% in the United States.

If the oil price drops in the future, it will be very good for energy importing countries.

However, for Canada, a major commodity exporter, price decline can restrain inflation on the one hand, but on the other hand, it will also drag down the Canadian economy and even the Canadian dollar to a certain extent.

In general, under the influence of geographical conflicts, epidemics and other factors, the "high fever" of inflation will remain for a long time.

Douglas Porter, chief economist of the Bank of Montreal, predicts that inflation is spreading more widely and is difficult to eliminate. It is expected that the worst has not yet happened, and Canada's inflation rate will still exceed 6% by the end of this year.

"Violent interest rate hike" is difficult to stop

On April 13, the Bank of Canada made a heavy blow, raising interest rates by 50 basis points, doubling the benchmark interest rate from 0.5% to 1%. The Bank of Canada also took the lead of the Federal Reserve, becoming the first G7 country to raise interest rates significantly since the outbreak of the epidemic.

Given that inflation is still high, the Bank of Canada will probably continue to "raise interest rates violently" next. Wang Xinjie predicted that after the last 50 basis points interest rate hike by the Bank of Canada, the expectation of another 50 basis points interest rate hike at the next interest rate meeting rose sharply.

In the future, the Bank of Canada may even raise interest rates by 75 basis points at a time. TIFF macklem, governor of the Bank of Canada, said that the Bank of Canada is trying to reduce the inflation rate from a high level, and the borrowing cost is likely to increase significantly in the future, which does not rule out the possibility of raising interest rates by 75 basis points in the future.

It should be noted that the Bank of Canada has raised its neutral interest rate forecast to the range of 2%-3% in April. It is unclear whether to continue to raise interest rates after reaching the neutral interest rate.

Some analysts pointed out that some economic factors may cause the Bank of Canada to suspend raising interest rates after reaching neutral interest rates, and the most prominent factor may be real estate.

As for the importance of real estate, Wang Xinjie said that real estate plays an important role in Canada's inflation and economy, accounting for 30.03% of the inflation composition, and the proportion of housing related industries exceeds 15% of GDP.

After the great flood since the epidemic in 2020, the disposable income of residents increased, and then there was the pursuit of anti inflation assets.

And the interest rate hike will undoubtedly drag down the performance of the Canadian real estate industry. Wang Youxin told reporters that raising interest rates will have a negative impact on the real estate market. The Canadian economy is highly dependent on real estate. With the increase of interest rates, the growth rate of investment and sales in the real estate market will slow down.

On the other hand, considering that Canada is a major exporter of minerals and fuels, the rise in commodity prices will have a positive impact on the export and sales of related industries, which will offset the negative impact of the interest rate hike to a certain extent.

On the whole, the Canadian economy will remain relatively stable. It is expected that the GDP growth rate this year will be slightly lower than that in 2021, and the performance will be better than that of other developed economies.

How to choose between controlling inflation and stabilizing growth? This is the biggest problem facing central banks at present. The specific monetary policy in the future will depend on economic data.

Now the common practice of all countries is to fight inflation by tightening monetary policy. Although it may "choke the throat of the economy", the risk of inflation is more serious than the concern of economic growth at present.

If we are lucky to curb inflation and there is no sharp decline in economic growth, we will achieve a "soft landing".

However, with the global economic growth slowing down, the risk of future economic recession coming earlier than the inflection point of inflation cannot be ignored. Wang Xinjie analyzed that from historical experience, economic recession itself can curb inflation. Similar to the second half of 2018, inflation naturally fell after the economic recession caused by tightening policies.

Then monetary policy began to relax in 2019, which is similar to the "Volcker moment", tightening to deal with inflation and easing to deal with economic growth.