Derek Burleton, deputy chief economist at TD Bank, joins BNN Bloomberg to talk about the Canadian economy that grew in March. He says unless the jobs market starts cooling, the risk of the next rate hike remains high.

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The balance of risks points to another hike in June: Economist

As the global economy continues to recover from the effects of the COVID-19 pandemic, economists are closely monitoring the balance of risks that could influence central banks’ decisions regarding interest rates. In this regard, many experts are suggesting that another hike in June is becoming increasingly likely.

The world has witnessed an unprecedented level of monetary stimulus over the past year, as central banks sought to mitigate the economic damage caused by the pandemic. As economies reopen and the recovery gains momentum, economists are now focusing on the potential risks associated with this loose monetary policy.

One of the primary concerns is the rising inflationary pressures observed in various economies. The surge in commodity prices, supply chain disruptions, and pent-up consumer demand have all contributed to a significant increase in inflation. Central banks, including the US Federal Reserve, have maintained that these price rises are temporary, largely influenced by base effects and transitory factors. However, if inflation persists and exceeds targets, central banks may be forced to intervene by tightening monetary policy.

Another key risk is the possibility of asset bubbles forming in financial markets. The ultra-low interest rates and abundant liquidity provided by central banks have led to a significant increase in asset prices, particularly in equity and housing markets. If these imbalances pose a potential threat to financial stability, central banks may consider tightening their monetary stance to address the issue.

Additionally, the pace of the global economic recovery plays a crucial role in the risk assessment. While many countries are experiencing a robust recovery, others are still grappling with the ramifications of the pandemic. Variants of the virus and the uneven distribution of vaccines introduce considerable uncertainty into the economic outlook. If the recovery stalls or faces significant hurdles, central banks may opt for a more cautious approach on interest rate hikes.

Considering these risks, many economists believe that there is sufficient evidence to suggest that another interest rate hike could be in the cards for June. Central banks might use this opportunity to begin normalizing monetary policy gradually, adjusting interest rates from their historic lows. However, the timing and extent of such hikes are crucial factors that central banks will closely evaluate to ensure a smooth transition for the economy.

In conclusion, as the global economic recovery gains traction, the balance of risks is pointing towards another interest rate hike in June. Rising inflation, potential asset bubbles, and the pace of the recovery all play an essential role in determining central banks’ future actions. While central banks seek to strike a delicate balance between boosting economic growth and maintaining financial stability, further interest rate hikes could be on the horizon to safeguard long-term economic health.