Market Wrap – Bank of Canada Hikes

The Canadian rose against a basket of currencies after the Bank of Canada unexpectedly raised the target for its overnight rate by 25bps to 4.75% after pausing the hike cycle in the previous two meetings.

Most market analysts were anticipating interest rates would be left on hold. Borrowing costs are now at high levels not seen in 22 years, as policymakers consider monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2% target.

Subsequently, the Canadian dollar rallied against the US dollar, with the USDCAD pair falling towards the 1.3300 level, marking a second straight day of losses on the FX market.

The central banks concerns have increased that inflation could get stuck materially above the 2% target, as annual CPI rose to 4.4% in April, the first increase in 10 months, the three-month measures of core inflation have been running in the 3.5-4% range for several months and excess demand is persisting.

Also, the central bank will continue to assess the dynamics of core inflation and the outlook for CPI inflation and remains resolute in its commitment to restoring price stability for Canadians.

The policy statement noted that “Globally, consumer price inflation is coming down, largely reflecting lower energy prices compared to a year ago, but underlying inflation remains stubbornly high.”

Furthermore, the Bank of Canada added that “While economic growth around the world is softening in the face of higher interest rates, major central banks are signalling that interest rates may have to rise further to restore price stability”.

The final part of the statement from the central bank noted that “Governing Council will continue to assess the dynamics of core inflation and the outlook for CPI inflation.”

And they added that “we will be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with achieving the inflation target. The Bank remains resolute in its commitment to restoring price stability for Canadians.”