The Bank of Canada (BOC) may have taken a big gamble on its economy when adopting a new hawkish tone on Wednesday, according to one economic research company.
The central bank raised interest rates to 0.75 percent from 0.50 percent – its first hike in seven years. Investors had prepared for such move but the BOC took a more hawkish tone than expected, mainly when it came to inflation.
Inflation figures have eased over recent months, but the bank said this was a temporary move and it is already registering some pressure from food, electricity and automobiles.
“The BOC expects excess capacity to be absorbed with inflation returning to 2 percent in 2018. We have a different view on inflation, which we see below 2 percent even in 2018,” analysts at Bank of America Merrill Lynch said in a note on Wednesday, explaining that oil prices will keep headline inflation low.
However, there are other economic worries in Canada. According to David Madani, senior Canada economist at Capital Economics, the BOC’s decision “is a gamble that might have to be reversed before long.”
“With the housing bubble already showing signs of bursting and household debt at extremely high levels, higher borrowing costs will dampen economic growth and pushing core inflation even further below target,” Madani added. Higher interest rates make mortgages more expensive and thus squeeze household incomes.