A sign is pictured outside the Bank of Canada building in Ottawa, Ontario, Canada, May 23, 2017.
A sign is pictured outside the Bank of Canada building in Ottawa, Ontario, Canada, May 23, 2017. Reuters / CHRIS WATTIE

The Bank of Canada on Wednesday is expected to announce its first half-point interest-rate increase in over 20 years, as the central bank accelerates its tightening timeline to tackle an overheating economy, analysts said.

Canada's six largest banks all foresee a half-point increase to 1.0% from 0.5% when the central bank releases its rate decision at 10 a.m. ET (1400 GMT), rather than the quarter-point increment the bank usually favors. Money markets see about a 85% chance of the larger increase.

"Inflation is running well above the BoC's target, the economy has fully recovered pandemic losses, and the jobless rate is the lowest since at least the mid-1970s, leaving absolutely no rationale for monetary policy to still be stimulative," said Benjamin Reitzes, Canadian rates & macro strategist at BMO Economics, in a note.

"It's time for the BoC to play catch-up."

The Bank of Canada last hiked by 50 basis points (bps) in May 2000.

The Bank has signaled it will act "forcefully" to tackle red-hot inflation and Governor Tiff Macklem, last month, left the door open for a 50-bps hike.

Inflation hit 5.7% in February, its 11th consecutive month above the Bank of Canada's 1-3% range. The Bank last month hiked rates for the first time in three years, increasing them to 0.5% from a record low 0.25%.

The policy rate will be the main lever for the central bank's drive to rein in inflation, with Canada's big bank economists all anticipating a second half-point hike in June.

The Bank is also widely expected to start quantitative tightening on Wednesday, allowing the large stake of government bonds it amassed during the pandemic to roll off as they mature.

Reducing its share of the bond market could transmit monetary policy more effectively to the economy, as borrowing costs tend to be determined by longer-term rates rather than the very short-term rate set by the BoC.

Still, the relative late start to tightening, coupled with the risk of inflation expectations becoming unhinged as prices continue to rise sharply, will force the Bank of Canada to move more aggressively than it has in the past, said economists.

"Whereas in the past they would start to tighten sooner and go slowly, this time they are tightening later, but they're probably going to go a lot quicker," said Stephen Brown, senior Canada economist at Capital Economics.

"What the topic is fast becoming now is where will rates end up," he added. Money markets see rates peaking at about 3% next year.