The Bank of Canada raised the overnight rate 50 basis points to 1.5% and stated it would continue its Quantitative Tightening (QT) policy.
On the state of the economy, the Bank noted that “Canadian economic activity is strong and the economy is clearly operating in excess demand. National accounts data for the first quarter of 2022 showed GDP growth of 3.1 percent, in line with the Bank’s April Monetary Policy Report (MPR) projection. Job vacancies are elevated, companies are reporting widespread labour shortages, and wage growth has been picking up and broadening across sectors.”
On inflation, it stated that “CPI inflation reached 6.8% for the month of April – well above the Bank’s forecast – and will likely move even higher in the near term before beginning to ease.”
On future policy action, the BoC stated that “with the economy in excess demand, and inflation persisting well above target and expected to move higher in the near term, the Governing Council continues to judge that interest rates will need to rise further.”
Key Implications
The BoC hit ‘repeat’ as it delivered on its second consecutive supersized rate hike and signaled more to come. With economic growth continuing at an above-trend clip, a labour market that keeps tightening, and a broadening in inflation, the current policy stance of the BoC is still too loose.
Our expectation is for the BoC to execute on another 50 basis point hike on July 13th. That would get the policy rate to the low end of neutral. Looking at the bond market reaction today, it is clear that market participants are preparing for even more from the BoC, with the Canada 2- and 10-year yields up 15 basis points and 10 basis points, respectively this morning.
