Are 2 or 3 Rate Hikes Enough to Curb Inflation?

An economist believes the Bank of Canada will increase interest rate by three times at most to curb inflation.

| More on:

The inflation reading in Canada rose to an alarming 5.1% last month. It could force the Bank of Canada (BoC) raise its benchmark rate multiple times to curb inflation. Many analysts, including economists at the big banks, also see the need for rapid action. However, David Rosenberg, the chief economist and strategist at Rosenberg Research & Associates, disagrees with the aggressive approach.

Rosenberg thinks that raising the interest rate more than three times is an overkill. The Feds risk inverting the yield curve that could signal an economic contraction. He further argued that the consumer price growth surged over the past year was due to supply-chain challenges.

Canadians who are saving for the future or building retirement wealth should keep their eyes on the ball. Rising inflation is a concern, but it shouldn’t alter long-term financial goals. If you’re an RRSP and TFSA user, hold more income-producing assets than cash in the investment accounts.

Rapid decline

Rosenberg opined that contrary to consensus estimates, inflation will come down rapidly by the second half of 2022. He said about the Fed’s potential action, “They’ll raise rates two or three times and pause. And I actually think that’ll be it for the cycle … There’s no sense in driving a stake into the economy because of inflation.”

BoC has no timeline regarding the start of rate hikes. However, Deputy Governor Tim Lane said the central bank is alert to the possibility that inflation could prove to be sticky than forecast. Lane said further that they can be forceful if necessary and are prepared to address whatever situation arises.

The TSX is back to negative territory (-0.22% year to date) on February 17, 2022, but it doesn’t mean investors should get out of the market. You can stay invested and move to recession-proof stocks like Capital Power (TSX:CPX) and Emera (TSX:EMA).

Straightforward business model

Capital Power builds, owns, and operates high-quality, utility-scale generation facilities. This $4.53 billion wholesale power producer is growth oriented with a strategic focus on sustainable energy. Capital Power prides itself in having a straightforward business model. Its contracted and merchant portfolio generates stable and growing cash flows from a contracted and merchant portfolio with investment-grade credit ratings.

Management has committed to a 5% annual dividend growth through 2025. The share price is $39.82, while the dividend yield is 5.54% if you invest today.

Safety net with growing dividends

Emera is a safety net if market volatility is rising. Investors can expect growing dividends as the $15.33 billion regulated electric utility company promises an annual dividend hike of 4-5% through 2024. The target is achievable as the $8.4 billion capital investment plan (2022 to 2024) will increase rate base by 7-8%.

For the full year 2021, adjusted net income rose 8.7% to $723 million versus 2020. Scott Balfour, Emera’s president and CEO, said investments in cleaner energy, infrastructure renewal, and service reliability should drive value and growth. The utility stock trades at $58.70 and pays a hefty 4.55% dividend.

End of historically low rates

The low-interest-rate environment will end soon, and analysts can only second-guess the central bank as to the number of rate hikes. Meanwhile, investors can negate the impact of rising inflation with growing dividends.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends EMERA INCORPORATED.

More on Dividend Stocks

four people hold happy emoji masks
Dividend Stocks

Love Dividend Growth? Check Out These 2 Income-Boosting Stocks

National Bank of Canada (TSX:NA) and another Canadian dividend-growth stock are looking like a bargain going into December 2024.

Read more »

An investor uses a tablet
Dividend Stocks

A Dividend Giant I’d Buy Over Enbridge Stock Right Now

Enbridge stock may seem like the best of the best in terms of dividends, but honestly this one is far…

Read more »

how to save money
Dividend Stocks

Got $1,000? The 3 Best Canadian Stocks to Buy Right Now

If you're looking for some cash flow from your $1,000 investment, these are the ideal investments to make.

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

A Dividend Giant I’d Buy Over BCE Stock Right Now

Don't get sucked in by BCE's 10% dividend -- the stock is a total yield trap. Buy this instead.

Read more »

Retirees sip their morning coffee outside.
Dividend Stocks

Consider Sienna Senior Living for a Stable Monthly Income

Buying this Canadian dividend stock could help you build a dependable monthly income portfolio for the long term.

Read more »

Female raising hands enjoying vacation, standing on background of blue cloudless sky.
Dividend Stocks

Best Beginner-Friendly Stocks to Buy Now in Canada

These top TSX stocks have delivered attractive long-term returns.

Read more »

customer uses bank ATM
Dividend Stocks

Here’s the Average TFSA and RRSP at Age 65 for Canadians

The TFSA and RRSP together make an ideal pairing for retirees, but is the average even enough?

Read more »

Paper Canadian currency of various denominations
Dividend Stocks

Should You Buy the 3 Highest-Paying Dividend Stocks in Canada?

A few dividend stocks saw a sharp correction in November, increasing their yields. Are they a buy for high dividends?

Read more »