News & Analysis

Today’s release of the Q1 Business Outlook Survey (BOS) and Canadian Survey of Consumer Expectations (CSCE) provided robust evidence that the Bank of Canada needs to continue with their current tightening cycle as near-term inflation expectations continue to rise.

However, the reports didn’t provide overwhelming evidence that ends the current 25bp vs 50bp debate for next week’s policy decision, especially as the data was collected ahead of the outbreak of the Ukrainian war. While much still depends on the outcome of Friday’s March Labour Force Survey data, we remain committed to our base case scenario that the Bank of Canada will raise rates more aggressively in April with a 50bp hike, while also embarking on passive balance sheet roll-off.

Number of firms expecting above 3% inflation over the 2-year horizon hits record highs as core inflation continues to rise

Both surveys showed near-term inflation expectations continued to tick upwards in the first quarter. Within the BOS specifically, 70% of firms surveyed expect inflation to be above 3% over the next two years, up from 67% in Q3, while 35.3% of respondents expect it will take 2-3 years for the BoC to bring inflation back to the 2% target.

Comparatively, 1-year ahead inflation expectations as measured in the CSCE ticked up from 4.89% to 5.07%, while 2-year ahead expectations also rose from 4.12% to 4.62%. Despite the continued rise in inflation expectations, the BoC won’t be too concerned due to the sensitivity of the measures to current spot inflation. The argument to look through the rise in near-term inflation expectations is further compounded by the relative stability in medium-term inflation expectations–5-year ahead consumer inflation expectations fell from 3.5% to 3.25% and remain below recent averages. However, cause for concern for the BoC arises from the building wage pressures that are becoming more apparent.

Within the CSCE surveying pool, workers are more likely to voluntarily leave their job than in previous quarters, probably due to the fact that wage growth is most visible in job-to-job moves within a tight labour market.

The increase in the probability of resignation comes at a time when the majority of surveyed workers saw their wages adjusted below the rate of inflation and 15.08% are very unsatisfied with their recent wage gains. Expectations of rising wages aren’t just visible within the consumer survey, however, as the average increase in wages expected by firms rose from 4.8% to 5.2%. The expectation from both sides of the table for higher wages comes at a time of severe capacity constraints for businesses, especially for labour as 40% of firms are failing to meet demand due to labour shortages. Given the limited level of slack in supply, risks are tilted towards wages overshooting current expectations.

While today’s data is heavily caveated by the fact that it doesn’t directly incorporate the shift in expectations due to the war in Ukraine, it does confirm our view that wages are set to pick up substantially from February’s rate of 3.3% YoY. In order to quell an uptick in inflation pressures stemming from domestic demand, and the formation of a wage-price spiral emerging, we continue to believe the BoC should take out an insurance policy by hiking rates 50bp at next week’s meeting. This is conditional on another robust jobs report on Friday, however.



Simon Harvey, Head of FX Analysis


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