We predicted that high inflation was likely not ‘transitory’ – remember that this was the narrative in late 2021 and early this year. That’s been proven to be a very weak and completely false narrative now. We predicted that if inflation was to persist at high levels that the BOC would have to raise rates quickly given they waited for 2 quarters before doing so in March – this has now happened. As we all know, the 50 basis points rate hike was not only called for by the big banks and many experts, but mentioned by Tembo in one of our earlier blogs from March – that’s now happened. The message across the media spectrum was that this was the biggest one time increase in rates in 20 years, and that’s true, so what does this all mean?

By hiking rates to this extent so soon after its March rate increase, the BOC has lost credibility, and has surrendered to the reality that our national inflation problem is both bad and now expected to be persistent for some time. The .50% hike also prompted many commentators to suggest that this will be one of many, and that further hikes are on their way. Big bank prime rates have already all gone up in response, so the impact of this hike, as always, will be immediate. Governor Macklem’s tone has shifted strongly: “Inflation is too high. It is higher than we expected and it’s going to be elevated for longer than we previously thought, we need higher interest rates.”

Tembo expects rates to continue rising, and soon, especially if March inflation numbers which should be coming out soon show an increase. Derek Holt, the head of capital markets economics at Scotiabank wrote in an email to Bloomberg that he expects another 50 basis point hike in June. Many economists now see rates hitting 3% by 2023, which would see bank prime rates and mortgage reach levels not seen in many decades. Keep in mind that when inflation last approached the 3% level in late 2018, rates almost hit 2%, inflation is almost double that and rates are half those levels. More rate hikes are likely on their way.