TORONTO (Reuters) – The Bank of Canada surprised on Wednesday with a full-percentage-point increase to its policy rate, a super-sized hike last seen in 1998, citing “higher and more persistent” inflation and the increased risk of those price gains becoming entrenched. The central bank, in a regular rate decision, raised its policy rate to 2.5% from 1.5%, and said more hikes would be needed.
The move was more forceful than the 75-basis point increase economists and money markets had forecast.
STORY:
MARKET REACTION: CAD/
LINK:https://www.bankofcanada.ca/2022/07/fad-press-release-2022-07-13/
COMMENTS
JAMES TELFSER, MANAGING PARTNER AT AVENTINE INVESTMENT COUNSEL
“The Bank of Canada rate rise of 100 basis points clearly means that they were very far behind the curve and so they’re trying to catch up in a hurry and not get into a situation where we have a whole series of inflation positive surprises.”
“The knee-jerk reaction is not too different from how the markets had been trading on the back of the U.S. inflation print, but you’re going to see some more pressure here on financials and technology in Canada.”
ANDREW KELVIN, CHIEF CANADA STRATEGIST, TD SECURITIES
“I think this (hike in rates) is totally justified. The inflation outlook was spiraling out of control. The Bank was clearly behind the curve. They needed to do something bold to show their commitment to the inflation target. I think this goes a long way to achieving it. Their work is not done; rates will need to move higher still. The Bank acknowledges that.”
DOUG PORTER, CHIEF ECONOMIST AT BMO CAPITAL MARKETS
“While it is surprising, it’s not a complete shock, because obviously inflation had run much, much hotter than the bank expected. I think the reason why I would say it’s surprising is that the bank has indicated that they want to be a source of predictability and stability, and the market was assuming and most economists were assuming that they would go by three quarters of a percentage point. So, from that aspect it’s surprising.”
“But when you stand back and look at the inflation environment and how far behind interest rates are below inflation this precise step is not that shocking and it does bring the bank’s bank rate right into the middle of the bank’s neutral range. So, from that angle, it makes sense that they would want to get rates to neutral as quickly as possible.”
“I think the other key feature here is you know, they say they’re front loading the rate hikes but then in the same breath warn that more rate hikes are coming. And frankly, I think the market is going to be on edge here about the possibility of more upside surprises on rate hikes in incoming meetings.”
(Reporting by Ismail Shakil, Fergal Smith; Editing by Denny Thomas)
