ANOTHER 50 BASIS POINT RATE HIKE AND BANKOF CANADA SIGNALS MORE TO COME
Another Jumbo Rate Hike, Signalling More To Come
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The Governing Council of the Bank of Canada raised the overnight policy rate by a full 0.50% once again today, marking the third rate hike this year. The two back-to-back half-point increases are without precedent, but so were the dramatic pandemic rate cuts in the spring of 2020. Indeed, with the surge in Canadian inflation to 6.8% in April, the Bank of Canada is still behind the curve. Today's press release suggests they now estimate that inflation rose again in May and could well accelerate further. Here are the key takeaways taken from today’s policy statement (Bank of Canada):
Bottom Line The concluding paragraph of the policy statement is as follows: "With the economy in excess demand, and inflation persisting well above target and expected to move higher in the near term, the Governing Council continues to judge that interest rates will need to rise further. The policy interest rate remains the Bank's primary monetary policy instrument, with quantitative tightening acting as a complementary tool. The pace of further increases in the policy rate will be guided by the Bank's ongoing assessment of the economy and inflation, and the Governing Council is prepared to act more forcefully if needed to meet its commitment to achieve the 2% inflation target." The Bank of Canada has told us we should expect at least another 0.50% rate hike when they meet again on July 13. It could even be 0.75% if inflation shows no sign of decelerating. The Bank estimates that the overnight rate's neutral (noninflationary) level is 2%-to-3%. Traders currently expect the policy rate to end the year at roughly 3%. This was a very hawkish policy statement. The central bank is defending its credibility and will continue to tighten monetary policy aggressively. |