Reaction to the Bank of Canada’s 100-bps shocker


July 18, 2022 Facebook Twitter LinkedIn Google+ Mortgage News Canada



Having been behind the inflation curve for many months, the Bank of Canada today tried to get ahead of it by delivering a surprise 100-bps rate hike.

That brings the Bank’s benchmark rate to 2.50%, a level not seen since 2008. Rates have now increased by 225 basis points, or 2.25 percentage points, since March.

In its accompanying statement, the Bank said it decided to “front-load the path to higher interest rates,” because inflation is “higher and more persistent” than the Bank expected. The Banks also said it expects inflation to remain at around 8% “in the next few months.”

In a press conference following the rate decision announcement, Bank of Canada Governor Tiff Macklem said the Bank’s goal is to get inflation back to its 2% target with a “soft landing” for the economy.

“To accomplish that we are increasing our policy rate quickly to prevent high inflation from becoming entrenched,” he said. “We expect interest rates will need to rise further to cool demand and bring inflation back to target and by front-loading our interest rate response, we are trying to avoid the need to increase interest rates even further.”

The move came on the same day that U.S. inflation data recorded a rise to 9.1%, its highest level since 1981.

Reaction to the Bank’s “super-sized” rate hike

Reaction to the Bank’s surprise move was swift. RBC’s Josh Nye said economists (himself included) aren’t likely to disagree with the Bank’s decision today.

“Data flow over the past month, including another upside surprise on inflation, a worrying increase in inflation expectations, a further decline in the already record-low unemployment rate, and accelerating wage growth, all suggest monetary policy needs to get away from stimulative territory as soon as possible,” he noted. “Tougher medicine will be needed to get inflation under control and we look for the policy rate to rise to a restrictive 3.25% by October.”

TD Bank senior economist James Orlando said today’s move raises the risk that the economy falls into recession, but that the Bank “has to accept this risk (and possible outcomes)” to prevent high inflation expectations from becoming even more entrenched.

“If this is indeed ‘front loaded,’ then it may not be followed with another 1% move in September, and we could see something back in the 50 to 75 basis point range,” he noted. “…although, that would still mean it’s a supersized summer.”

Commenting on the larger-than-expected move, economists at National Bank of Canada said, “Clearly, this is a central bank desperate to wrangle inflation (and expectations) back under control, which is proving difficult given Canada’s still solid near-term economic outlook and tight labour market.”

The BoC’s latest forecasts

The Bank of Canada also released its latest Monetary Policy Report (MPR) today. Here are the highlights of its updated forecasts:

Inflation

  • The bank expects consumer price index (CPI) inflation to average:
    • 7.2% in 2022 (vs. 5.3% in its previous forecast)
    • 4.6% in 2023 (vs. 2.8%)
    • 2.3% in 2024 (vs. 2.1%)

“These revisions mainly reflect more persistent and broad-based inflationary pressures
than previously estimated,” the Bank said. “They also reflect higher commodity prices and wider-than-usual gasoline refinery margins as well as rising inflation expectations.”

GDP forecast

  • The Bank now expects annual economic growth of:
    • 3.5% in 2022 (from a previous forecast of 4.25%)
    • 1.75% in 2023 (from 3.25%)
    • 2.5% in 2024 (from 2.25%)

Featured image by David Kawai/Bloomberg via Getty Images

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