Scotiabank chief economist says another BoC rate hike is 'required,' but not everyone agrees

Freeland, Poilievre debate inflation Deputy Prime Minister Chrystia Freeland and Conservative Leader Pierre Poilievre sparred over the causes of inflation in Canada.

Economists are offering differing opinions on whether the Bank of Canada should raise interest rates again after a slight uptick to the annual pace of inflation last month.

On Thursday, Scotiabank's chief economist released his forecast, arguing that Canada's central bank "no longer has the luxury to wait to see how the balance of inflation risks evolves in coming months."

"As a result, we now think a 25 basis points move is required at the June meeting," Jean-François Perrault wrote in a research note to investors Thursday. "Governor (Tiff) Macklem should leave the door clearly open to additional moves should those be required. We continue to expect the policy rate will be cut early next year and see little chance of a cut this year.

"That being said, this move is best seen as insurance against inflation. Our model does not indicate a need for higher rates despite the April inflation shock and other developments."

The annual inflation rate rose in April for the first time since it peaked in June last year. The consumer price index rose to 4.4 per cent in April compared to a year ago, up from 4.3 per cent in March.

On top of that, the Canadian Real Estate Association reported that home sales in April jumped 11.3 per cent from the previous month, with the average home price up more than $100,000 compared to January.

Last month, the Bank of Canada announced it would hold its key interest rate at 4.5 per cent for now and said it expects the annual inflation rate to come down to about three per cent in the coming months.

But Macklem has said further rate hikes are possible if inflation remains stuck above the bank's two per cent target.

Statistics Canada says higher mortgage interest costs and rent prices partly drove the increase in annual inflation in April.

Perrault says while one month "definitely does not make a trend," the April figure did cause it to raise its forecast for core inflation to 3.9 per cent for 2023 and 2.3 per cent in 2024.

"The rise in inflation and perhaps more importantly the surge in housing market activity and still robust employment markets suggest that risks around the Bank of Canada's inflation outlook are tilted to the upside, as we have long argued," Perrault said.

"With inflation on a gradual downward path so far this year, the risks to the inflation outlook were manageable at current policy rate settings."

Scotiabank economists say they continue to believe that a mild recession is likely for Canada beginning in the second quarter of the year, "though economic indicators remain reasonably positive." They forecast a "historically modest" increase to the unemployment rate from five per cent currently to 5.7 per cent by the end of the year.

A separate analysis from BMO's chief economist, released Friday, says it does not believe the fundamental inflation outlook has changed.

"We would never dream of saying 'we told you so,' but we have been loudly warning for months that it was not going to be a straight-line, bump-free descent for inflation back to the two per cent target," BMO's Douglas Porter said in a research note.

Porter says it is "almost certain that headline inflation will take a mighty step down next month," potentially by a full percentage point into the low threes.

"And a few analysts are now openly calling for the Bank to start hiking rates again as soon as the June 7 meeting. That would likely be a mistake, and a better option would be to at least await the May jobs and CPI data, not to mention an early look at Q2 GDP, for a more complete picture of how the economy is faring," Porter said.

Another factor to consider in terms of rate hikes, Porter notes, is whether the United States defaults due to its ongoing dispute over raising the debt ceiling.

With files from The Canadian Press and The Associated Press