Does the BoC Have More Hikes in Store?
The Bank of Canada unexpectedly raised interest rates on Wednesday by 25 basis points, triggering a sharp appreciation in the Canadian dollar and taking it to more than two-year lows against the greenback.
Having only raised interest rates for the first time since 2010 at the last meeting, traders were clearly of the belief that the BoC would hold off today and take a more cautious approach to tightening. Especially as there appeared no urgent need to do so, with inflation still well below target at 1.2%. Clearly policy makers at the central bank did not share this view, raising the overnight target rate to 1% and citing the stronger than expected economy in the process.
Interestingly, the BoC did also reference elevated household indebtedness and the impact that these rate rises could have on it. Perhaps the role of the consumer in the strong performance of the economy, driven by debt, is at least part of the reason the central bank is taking such pre-emptive action, despite price pressures not warranting it.
Given how sudden and drastic – by recent standards – the BoC’s moves have been, traders may now be wondering what more we can expect from the central bank. Today’s rally in the loonie may not just represent surprise at this particular decision but also a recalculation of what the central bank may do going forward. Two rate hikes in a row after such a sustained period of none is a bold move and traders may now be expecting more in the months ahead.
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