The Bank of Canada is likely to forge ahead with its first interest rate increase in years on Wednesday, economists predict, though uncertainty tied to the war in Ukraine could put the pace of future rate hikes into question.
The central bank said in January that its special guidance around the COVID-19 pandemic, which kept its key overnight rate at 0.25 per cent for much of the past two years, has ended.
Senior bank officials strongly signalled rates need to rise in an effort to tamp down on inflation, which hit 5.1 per cent in Canada last month a high not seen in 30 years.
Economists who spoke to Global News expect a series of increases from the Bank of Canada this year, likely starting with 25 basis points on Wednesday, though the length of the conflict in the Ukraine could affect that roadmap later in the year.
Beata Caranci, chief economist with TD Bank, told Global News on Tuesday that she still expected the telegraphed 25 basis point hike on Wednesday.
3:05 How Russia’s military strategy is shaping how the West reacts
How Russia’s military strategy is shaping how the West reacts
Though Russia’s invasion has already hit markets hard, sending prices soaring on commodities such as oil and wheat, Caranci said the long-term impact of the war isn’t yet known and won’t affect the Bank of Canada’s immediate decision making.
Should the conflict persist into the second quarter of the year, the bank will have to start baking the war’s economic impact into its outlook, she said.
“If we continue to see high financial market stress as we get into April and May, at that point, that’s where it starts to become a greater economic drag,” Caranci said in an interview.
50-basis-point hike ‘off the table’
While some chatter in economic circles pegged the first hike of the year at 50 bps, BMO’s managing director of Canadian rates Benjamin Reitzes told Global News last week that such a hike was “unlikely” to begin with and is now “off the table” amid Russia’s invasion.
“The Bank of Canada has provided no signal that they are looking at a 50 basis point move, and they’ve made it pretty clear that they want to be as transparent as possible and they do not want to cause any volatility. And an unexpected 50-basis-point move would cause some volatility,” he said.
Both Reitzes and Caranci say a prolonged conflict in Russia could affect the pace or overall magnitude of the bank’s decision making.
4:14 How a Bank of Canada interest rate hike could affect you
How a Bank of Canada interest rate hike could affect you
The bank could hike rates at every other scheduled announcement, or hold off on increasing rates beyond one per cent while officials re-evaluate the effect the conflict and other inputs are having on Canadian consumers.
“The current conflict and the fact that oil prices are moving the way they are — and will likely hurt consumers if they stay up here — means that the bank might actually pause for maybe longer,” Reitzes says.
War keeps inflationary pressure high
As a major crude exporter, the Canadian economy is likely to see a slight bump thanks to the record high prices on oil, which topped $100 USD per barrel last week.
But economists warn that Canadians will also faces those higher prices at the pump, without a similarly strong dollar to soften the blow.
Reitzes noted that while the Canadian dollar used to be tied closely to the value of oil, that “correlation has all but broken down” as global demand for crude has waned in recent years.
Pedro Antunes, chief economist at the Conference Board of Canada, told Global News that the central bank had likely hoped to see inflation wane ahead of its March decision as supply chain issues looked to be easing.
But inflationary pressure remains high as food prices are hit by the expensive global costs of wheat as well as of oil, which underpins North America’s trucking-based transportation industry.
How high prices go, the effect on the global economy and how the Bank of Canada reacts will remain to be seen in the months ahead, Antunes said, adding consumer relief will not come quickly no matter how the central bank moves on Wednesday.
“How long this lasts and how much this adds to inflationary pressures over the year, I think is still a question mark, obviously, but there’s no doubt we’re going to see (inflation rates) upwards of five per cent in coming months.”
— with files from Global News’s Anne Gaviola
5:33 The financial ripple effects of the war in Ukraine
The financial ripple effects of the war in Ukraine
Demands for government intervention in Air Canada labour talks could negatively affect airline competition in Canada, the CEO of travel company Transat AT Inc. said.
“The extension of such an extraordinary intervention to Air Canada would be an undeniable competitive advantage to the detriment of other Canadian airlines,” Annick Guérard told analysts on an earnings conference call on Thursday.
“The time and urgency is now. It is time to restore healthy competition in Canada,” she added.
Air Canada has asked the federal government to be ready to intervene and request arbitration as early as this weekend to avoid disruptions.
Comments on the potential Air Canada pilot strike or lock out came as Transat reported third-quarter financial results.
Guérard recalled Transat’s labour negotiations with its flight attendants earlier this year, which the company said it handled without asking for government intervention.
The airline’s 2,100 flight attendants voted 99 per cent in favour of a strike mandate and twice rejected tentative deals before approving a new collective agreement in late February.
As the collective agreement for Air Transat pilots ends in June next year, Guérard anticipates similar pressure to increase overall wages as seen in Air Canada’s negotiations, but reckons it will come out “as a win, win, win deal.”
“The pilots are preparing on their side, we are preparing on our side and we’re confident that we’re going to come up with a reasonable deal,” she told analysts when asked about the upcoming negotiations.
The parent company of Air Transat reported it lost $39.9 million or $1.03 per diluted share in its quarter ended July 31. The result compared with a profit of $57.3 million or $1.49 per diluted share a year earlier.
Revenue totalled $736.2 million, down from $746.3 million in the same quarter last year.
On an adjusted basis, Transat says it lost $1.10 per share in its latest quarter compared with an adjusted profit of $1.10 per share a year earlier.
It attributed reduced revenues to lower airline unit revenues, competition, industry-wide overcapacity and economic uncertainty.
Air Transat is also among the airlines facing challenges related to the recall of Pratt & Whitney turbofan jet engines for inspection and repair.
The recall has so far grounded six aircraft, Guérard said on the call.
“We have agreed to financial compensation for grounded aircraft during the 2023-2024 period,” she said. “Alongside this financial compensation, Pratt & Whitney will provide us with two additional spare engines, which we intend to monetize through a sell and lease back transaction.”
Looking ahead, the CEO said she expects consumer demand to remain somewhat uncertain amid high interest rates.
“We are currently seeing ongoing pricing pressure extending into the winter season,” she added. Air Transat is not planning on adding additional aircraft next year but anticipates stability.
“(2025) for us will be much more stable than 2024 in terms of fleet movements and operation, and this will definitely have a positive effect on cost and customer satisfaction as well,” the CEO told analysts.
“We are more and more moving away from all the disruption that we had to go through early in 2024,” she added.
This report by The Canadian Press was first published Sept. 12, 2024.
