With the economic recovery gaining momentum, expectations of inflationary pressures are starting to mount, and will likely prompt central banks to hike interest rates as early as 2022.
According to Royal Bank of Canada CEO Dave McKay, the extensive levels of liquidity that is currently sitting on households’ balance sheets, coupled with the ongoing vaccine rollout and additional stimulus spending, will create strong economic growth in the second half of the year. In fact, McKay anticipates the economic rebound will be particularly pronounced in those sectors that have been impacted the most by the Covid-19 pandemic, such as the food and accommodation.
As a result, the underperforming sectors are expected to pick up excess slack in the economy, and could even outperform previous forecasts for next year. “Therefore when you look at input prices — commodities, labor, goods and services— we see inflationary pressure building earlier than later,” McKay explained.
Indeed, inflation expectations are already showing signs of seeping into credit markets, causing rates to increase at the long end of the curve. Central banks, especially the Federal Reserve, have noted they will allow the trend to continue for the time being, but could potentially respond earlier than previously anticipated. “We do see a challenge to the policy and central banks having to respond to this in 2022, latter half of 2022, with rate increases— versus where you might have thought late 2023 or 2024 six months ago,” McKay noted.
Information for this briefing was found via RBC. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.