The Bank of Canada raised the overnight rate by 50 basis points to 3.75%, while stating that it will continue with Quantitative Tightening (QT).
On rising prices, it stated that “measures of core inflation are not yet showing meaningful evidence that underlying price pressures are easing. Near-term inflation expectations remain high, increasing the risk that elevated inflation becomes entrenched.”
On economic growth, the Bank stated that it “is expected to stall through the end of this year and the first half of next year as the effects of higher interest rates spread through the economy. The Bank projects GDP growth will slow from 3¼% this year to just under 1% next year and 2% in 2024.”
On the future path of policy, the Bank noted that “given elevated inflation and inflation expectations, as well as ongoing demand pressures in the economy, the Governing Council expects that the policy interest rate will need to rise further.”
Key Implications
The Bank of Canada has slowed the pace of rate hikes, as it pivots to a more forward-looking policy framework. Given the BoC’s expectation for stagnant growth from now through the end of 2024, the focus is on how past interest rate hikes will weigh on the economy going forward. Though the BoC is not done hiking this year, we are clearly nearing a peak in the policy rate.
With the BoC undershooting market expectations of a 75 basis-point hike today, yields are falling. The Canada 2-year yield is down nearly 20 basis points at writing, as market participants price in a lower terminal rate. Governor Macklem is on deck with his press conference and we will all be closely watching how he navigates this policy shift.
