Expectations for the first interest rate hike have moved up to as early as April as inflation concerns grow and supply disruptions persist.

Nearly half of Canadian businesses (45%) expect inflation to run hot at 3% over the next year, according to the Bank of Canada’s third-quarter Business Outlook Survey released Monday. Another 42% of businesses expect inflation of 2-3%, while just 10% foresee inflation of between 1% and 2%.

The inflation concerns were largely driven by worsening supply disruptions that will limit sales, along with labour shortages and the need for higher wages, both of which will drive prices higher. The silver lining is that most businesses see higher inflation as being temporary.

Because inflation expectations are a major driver of inflation, markets have taken notice and now see the Bank of Canada being forced to raise interest rates sooner than the second half of 2022.

Other market watchers agree that rate hikes are likely to come sooner than expected. David Wolf, a portfolio manager for Fidelity Investments, says the Bank of Canada is overestimating the amount of slack in the economy and will therefore need to raise rates well before the second half of the year.

“The bank thinks that there’s a lot of capacity, which I don’t think there really is, and the facts on the ground of rising prices show that,” Wolf said at the Bloomberg Canadian Fixed Income Conference, He added that expectations for the first rate hike in the second half of 2022 are off base.

“It’s going to come a lot sooner than that,” Wolf added.

In addition to raising interest rates, central banks around the world are growing increasingly eager to withdraw economic stimulus in the form of Quantitative Easing (QE).

For the Bank of Canada, that means further diminishing its ongoing purchases of $2 billion worth of bonds per week.

At the height of the program, the Bank was purchasing up to $5 billion worth of bonds per week, but that amount has gradually been reduced. In total, the Bank has acquired nearly $312 billion of Government of Canada debt since last March in an effort to add liquidity to the market.

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