Inflation in Canada peaks

Rising commodity prices, triggered by the geopolitical situation in Ukraine, will further boost inflation in Canada, with the overall rate now peaking above 6%, forcing the central bank to raise interest rates more aggressively. Canada's inflation rate is already well above the 5.1% that the Bank of Canada forecast for the first quarter in January, stressing that there is a difficult road ahead to reduce price increases to the inflation target of 2%.

The central bank will have to balance efforts to rein in soaring prices with the risk that rising mortgage debt levels could make Canada's economy more sensitive to rising interest rates than it was before the coronavirus pandemic.

Some investors fear that if the Bank of Canada tightens its monetary policy too quickly, it could interrupt its economic expansion.

According to a survey of economists at five leading financial institutions and consultancy firms, it is clear that most are expecting the Bank of Canada to raise the cost of borrowing four to five times in 2022, boosting the discount rate to 1.25% or 1.5% by the end of the year.

Scotiabank forecasts that the discount rate could reach 2.5% by the end of the year.

Canada's latest inflation data released on Wednesday surprised on the positive side with the consumer price index hitting a new 30-year high of 5.7% in February. The jump was driven by broad-based growth across all sectors.

Economists forecast that the current peak inflation rate could last for several months and their year-end forecasts range from 3.3% to 5.8%. The Bank of Canada's January forecast was for inflation in the fourth quarter to be at 3%.

This month the central bank raised the interest rate for the first time in three years to 0.5% from 0.25%. Bank of Canada Governor Tiff Macklem said more rate hikes were coming and added that the increase would be at least half a per cent.

The next interest rate decision meeting will be on April 13. It has been almost 22 years since Canada had a 50 basis point rate hike.

The geopolitical situation in Ukraine has damaged supply chains around the world, causing prices for many key commodities to rise. Russia is one of the world's largest energy producers, and both it and Ukraine are among the top grain exporters.

An increase in oil prices from the end of February would by itself add around three-quarters of a percentage point to the Canadian consumer price index.