The Bank of Canada raised the overnight rate to 2.5% and stated that it will continue with Quantitative Tightening (QT).
On rising prices, it stated that “inflation in Canada is higher and more persistent than the Bank expected in its April Monetary Policy Report (MPR), and will likely remain around 8% in the next few months.”
On economic growth, the Bank stated that it “expects Canada’s economy to grow by 3½% in 2022, 1¾% in 2023, and 2½% in 2024. Economic activity will slow as global growth moderates and tighter monetary policy works its way through the economy. This, combined with the resolution of supply disruptions, will bring demand and supply back into balance and alleviate inflationary pressures.”
On today’s surprise 1% hike, the Bank noted that “with the economy clearly in excess demand, inflation high and broadening, and more businesses and consumers expecting high inflation to persist for longer, the Governing Council decided to front-load the path to higher interest rates by raising the policy rate by 100 basis points today.”
Key Implications
The Bank of Canada cranks up the AC again in an effort to cool the economy. The supersized 100 basis point hike is its most aggressive move since the summer of 1998. If that feels like a long time ago, it was. Coincidentally, that summer Armageddon was topping the box office and the world was singing “I Don’t Want to Miss a Thing”. Though this isn’t Armageddon, this BoC meeting is not one to be missed.
This big step up in rates is uncommon, so too is the economic backdrop. With the unemployment rate at 4.9%, wages running at 5.2%, and inflation at 7.7%, the pressure on the BoC has not let up. As we recently discussed in our updated Quarterly Economic Forecast, the hit to consumers from high inflation and rising rates will weigh on growth over the remainder of this year and into 2023. Though this raises the risk that the economy tips into recession, the Bank has to accept this risk (and possible outcomes) in order to prevent high inflation expectations from becoming even more entrenched.
All eyes will be on Governor Macklem in his upcoming press conference. 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…although, that would still mean it’s a supersized summer.
