Instant View: Bank of Canada unveils 75-basis point hike and flags more increases

The Bank of Canada hiked interest rates by 75-basis points to a 14-year high on Wednesday, as expected, and said the policy rate would need to go higher still given the fight against raging inflation.

“For those asking ‘are we there yet?’, the Bank of Canada answered ‘not yet’, signaling that today’s outsized rate hike still leaves rates shy of where it believes they will need to be to quell inflation.”

“The Bank’s statement put emphasis on the high recent core CPI reading, and while noting that Q2 growth missed their forecast, they emphasized the strength of domestic demand. All told, a bit more hawkish than we anticipated, although the market has priced in additional hikes.”

“The BoC specifically noted that core inflation was strong and expectations are rising, so they aren’t getting complacent because of the headline dip. They also downplayed the weakness in growth by highlighting signs of strong domestic demand, which further supports their verbalized commitment to achieving the 2% mandate.”

“Finally, the rate statement maintained the language about judging that interest rates will still need to rise, but dropped any mention of front loading. We’re reading this as implicit approval of market pricing, which suggests that we’ll get another 25 or 50 bps in October and 25 bps in December to reach a terminal rate of 3.75% to 4%.”

“Perhaps a little firmer on the forward guidance. They didn’t signal any moderation going forward … It does feel as though the bank is preparing the market for the possibility that rates will need to keep moving higher for more than one or two more meetings. So I think they are trying to keep as many options as open as possible.”

“Obviously, the headline move was no surprise. I read the statement as being mildly on the hawkish side. They (BOC) sort of downplayed the softness in second quarter growth and are concerned about the upswing in underlying inflation, specifically citing the measure excluding gasoline.”

“Even as they expect growth to moderate, there are obviously concerned about inflation expectations becoming, in their words, more entrenched.”

“I don’t really find anything terribly surprising. It’s just the tone I think lands on the somewhat aggressive side of the ledger and so it doesn’t sound to me like this is the last rate hike by any means.”

“Based on this, there’s a fairly high risk that they hike rates at each of the next two meetings. We’ll have to see whether those are just small hikes or larger and I think a lot of that will depend on what happens to headline and core inflation in the next few months.”