Economists expect Bank of Canada to raise interest rate by 0.75 percent in September

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      Economists expect the Bank of Canada to make another outsized increase in its interest-setting rate next month.

      The consensus points to 0.75 percent come September 7.

      This could follow the one percent increase made by the central bank in July, which brought its policy rate to 2.5 percent.

      The anticipated 0.75 percent hike was mentioned by economists with private banks after Statistics Canada released a report on inflation Tuesday (August 16).

      The economists noted that while overall growth in consumer prices decelerated in July 2022, core inflation remained strong.

      Core inflation is basically a change of the consumer price index, minus food and energy.

      Derek Holt with Scotiabank noted that average core inflation increased to 5.3 percent year-over-year in July.

      “The Bank of Canada won't care about the headline softening,” Holt wrote.

      The Scotiabank economist continued, “They'll be more concerned about ongoing upward pressure upon core measures. The data lends itself to a 75bps [basis points] move on September 7th that would bring the policy rate closer to being in very mildly restrictive territory given estimates of the neutral policy rate range of 2–3%.”

      Karyne Charbonneau with CIBC Capital Markets observed that inflation has “taken its foot off the gas, but other elements in July’s inflation story were not as reassuring”.

      Charbonneau stated that the Bank of Canada is “probably keeping a close eye on inflation ex food/energy these days”, referring to core inflation.

      “Today's acceleration in that category is therefore not good news for the Bank, which should still be on track for a 75bps increase in rates at its next meeting,” the CIBC economist wrote.

      Meanwhile, Leslie Preston with TD bank also noted that core inflation was up 5.3 percent in July, marking an increase from the 5.2 percent level in June.

      Overall inflation growth eased to 7.6 percent in July compared to the 8.1 percent annual increase in June.

      “We currently expect a 50 basis point hike, but it appears market odds tipped a bit more towards a larger 75 basis point move, likely focusing on the lack of progress in core inflation measures,” Preston wrote.

      Douglas Porter with BMO wrote that the central bank “can scarcely back down anytime soon, as it has a long-term battle on its hands reining in 5% core inflation”.

      “So while inflation is coming in a tad below what the Bank of Canada expected in their latest forecast (they had 8% for the Q3 average), we still look for a minimum of a 50 bp hike at their next meeting in early September,” Porter wrote.

      For its part, RBC Economics released a paper noting that while inflation has eased a bit, this is “not enough to derail the Bank of Canada from its currently aggressive hiking path”.

      “We look for the BoC to hike the overnight rate by 75 bps in its next meeting in September, and bring it up to 3.5% subsequently by the end of this year,” the RBC paper stated.