It is widely expected the Bank of Canada will raise key interest rates one-quarter of a percentage point on Wednesday.
This would bring the central bank’s rate to 5 per cent, making it the highest in 22 years.
One expert told CTV’s Your Morning on Wednesday “mixed messaging” on inflation is likely playing into the bank’s decision.
“Certainly when we look at the inflation numbers they’ve been coming down fairly regularly,” David Macdonald, senior economist at the Canadian Centre for Policy Alternatives, said, adding lower gas and energy prices are contributing to the drop.
Macdonald said due to past rate hikes, mortgage interest rates and rent are increasing inflation.
“We’re in an interesting predicament at this point, that house prices are not falling quickly enough to offset these higher mortgage costs,” he said. “And therefore higher interest rates are making inflation slightly worse.”
Another hike would have a “relatively limited impact” on homeowners, Macdonald said.
“At most, there’s going to be a quarter point today,” he said. “The real factor is how long higher rates stick around. So whether it’s four and three quarters, or five is to some degree neither here nor there. The question is, how many Canadians are going to be forced to renew with these higher rates?”
Another key area driving inflation is the labour market, Macdonald said.
“While unemployment has gone up over the past two months, that’s largely because more people are encouraged by the job market, and they’re looking for work, and if you look for work then you count as unemployed,” he said.
In the positive labour market, hourly wage rates are increasing faster than the rate of inflation, Macdonald said.
“This continued strength in the job market, I think is likely what will drive a higher interest rate later on today,” he said. “More people need to be unemployed…I don’t think that’s what workers want to hear, but that’s what the bank wants to see.”
To watch the full interview click the video at the top of this article.