We all have been speculating about the interest rate hike by the Bank of Canada (BOC) today. As expected they increase the rate by 25 basis points. It is crazy to think that the Bank paused the rate for two meetings and had to go back on the hiking spree. Does this mean we are doomed in curbing inflation down to 2%? Are we still hoping to see the inflation at 3% this summer as predicted?

I do not have answers to all that as the BOC press release used the word "surprisingly" more than three times. If they are surprised then what does it tell you about the rest of the public?

What went wrong in the last three months?

I have been following the data produced by StatsCan for the last two years. I posted an article a week ago to explain how the Gross Domestic Product (GDP) posted higher than expected numbers in the first quarter of this year.

In that article, I speculated how the GDP numbers may force BOC to revisit their rate pause decision. The GDP growth of 3.1% was way stronger than expected. Consumption growth was higher even after the huge influx of new immigrants. The per capita growth was expected to go down amidst the population boom which was not the case, unfortunately. This spring season also saw the boom in the housing market activity as there were many houses sold over than asking price.

In addition to that, the inflation number for April was also higher than expected. The inflation in April was at 4.4% which was the first increase in 10 months. It was up by 0.1% but the problem lies with the upward trend along with other unfavorable data.

BOC noted that they expect the CPI inflation to ease to around 3% in the summer once the lower energy price feeds into the data. We all know that central banks are still using lagging data sets. The press release highlighted the concerns of sticky inflation.

However, with three-month measures of core inflation running in the 3½-4% range for several months and excess demand persisting, concerns have increased that CPI inflation could get stuck materially above the 2% target.

The labor data is not favorable either. The data suggests there is strong demand for labor and that means the demand is still higher and that is pushing the economy. I am not sure how to believe this data as more and more people are literally lining up for jobs in downtown Toronto and sub-urban centers. The job numbers do not differentiate between full time and part time and temporary jobs. There is a huge gap in understanding as more and more permanent jobs are being replaced by temporary jobs. The higher rate of immigration is also not helping the case as the market is quickly absorbing the new workforce. The market is absorbing but what kind of job and what is the living condition are the right questions to ask.

The BIG Decision - 25 basis points increase

Based on those three sets of data on CPI, labor demand and economic growth, the governing council decided to increase the interest rate by 0.25%. The Bank accepted that the trajectory of inflation is not right and this will not reach the target inflation rate of 2%. They want to bring a balance to the supply and demand using the only tool that they have in their arsenal. In retrospect, the bank thought their monetary policy was not sufficiently restrictive.

We are screwed

There is no way this can be a good decision for us consumers. I am particularly mad about how the government is not doing anything to curb the price increase in food and the housing market. I wrote an article yesterday on the household debt and how a major disaster could send our economy down with so much at stake. The increased rate has heightened the risk one more time. We need to make sure we are using the right data and right time and saving the retailers.

Look what the government is saying now

we will be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behavior are consistent with achieving the inflation target. The Bank remains resolute in its commitment to restoring price stability for Canadians.

I don't think the bank cares about the corporate pricing behavior. The government is not doing anything to control pricing at the moment. The companies are too big to fail for the government and the Canadian economy relies on our housing market. It is never coming down.

I am expecting another rate hike in July. Damn it.

Posted Using LeoFinance Alpha