BoC Turns Up The Dial On Interest Rates

 

- Policymakers lifts rate 100bps to 2.5% 

- Excess demand, high inflation precipitate move 

- Bank says frontloading needed to ensure soft landing 

- Significant revisions to growth, inflation forecasts 

 

 

By Harry Daniels 

LiveSquawk News 

@HarryDaniels71 

  

14 July 2022|10:00 GMT 

  

  

The Bank of Canada decided to frontload monetary policy at its July meeting on concerns that inflation expectations were becoming entrenched.   

 

The governing council lifted its three main rates by a full percentage point, above the market consensus for a 75-basis point hike. It increased its target for the headline overnight rate to 2.5%, with its bank rate at 2.75% and the deposit rate at 2.5%. The bank said it would continue its policy of quantitative tightening (QT). 

 

The surprise move compounded market disappointment from US CPI data from June released earlier in the day. American annual inflation outpaced median forecasts by three-tenths of a percentage point to 9.1%.  

 

The message from Bank of Canada Governor Tiff Macklem was loud and clear, “The Canadian economy was now clearly in excess demand, and inflation was high and broadening.” He cited increasing consumer prices and inflation expectations, an overheating economy, and the governing council’s desire to frontload the interest rate response., as reasons for the outsized move on Wednesday.  

 

The TD Securities global rates team said, “While today's decision was a surprise for markets, we view a 100bp hike as appropriate with the economy in excess demand and inflation running close to 8%.” 

 

More hikes to come

Macklem reiterated the bank’s desire to engineer a soft landing for the Canadian economy. He noted that faster hikes in the near term would negate the need to increase them further in future. He said although he wasn’t concerned about a wage hike spiral, elevated house prices were feeding into demand and the BoC wanted to dampen demand. 

 

TD securities noted, “Today's decision leaves policy in the bank's neutral range, and they are still behind the curve. We continue to look for at least a 50bp hike in September but note that policy decisions will become more difficult into Q4 as higher rates start to bite.” 

 

Rabobank strategist Christian Lawrence said, “Both the Fed and the BoC find themselves caught between a rock and a hard place as they face high (primarily cost push) inflation and a slowdown in consumption. We know they have chosen what they deem as the lesser of two evils, a near term recession over the risk of inflation moving into double-digits.” 

 

Updated staff projections

The bank heavily revised its economic forecast, saying it now expects Canada’s economy to grow 3.5% in 2022, 1.75% in 2023, and 2.5% in 2024. Bank staff said inflation will begin to come back down later this year, and ease to approximately 3% by the end of 2023 before returning to its 2% target by the end of 2024. 

 

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