Market Wire - Bank of Canada Hikes 50 Basis Points, Sharply Raises Inflation Forecasts

Karl Schamotta, Chief Market Strategist: karl.schamotta@corpay.com

The Bank of Canada raised its benchmark rate by 50 basis points, announced it would begin unwinding balance sheet purchases, and aggressively raised its inflation forecasts this morning - something that will make additional jumbo-sized hikes more likely in coming months. 

In the statement accompanying the decision, policymakers said, “In Canada, growth is strong and the economy is moving into excess demand. Labour markets are tight, and wage growth is back to its pre-pandemic pace and rising. Businesses increasingly report they are having difficulty meeting demand, and are able to pass on higher input costs by increasing prices”. Growth projections remain solid, with the economy expected to expand 4.25 percent this year, before slowing to 3.25 in 2023 and 2.25 in 2024. 

The Bank announced it was “ending reinvestment and will begin quantitative tightening”, on April 25, with the balance sheet expected to passively decline over time as maturing assets are no longer replaced. 

Updated forecasts contained in the Monetary Policy Report showed inflation is now expected to hit 4.7 percent in the fourth quarter, up sharply from the 3 percent projected in January. The statement said, “Price spikes in oil, natural gas and other commodities are adding to inflation around the world. Supply disruptions resulting from the war are also exacerbating ongoing supply constraints and weighing on activity. These factors are the primary drivers of a substantial upward revision to the Bank’s outlook for inflation in Canada”.

The Canadian dollar dropped slightly on the decision, echoing the buy-on-rumour/sell-on-news reaction seen after the Reserve Bank of New Zealand raised rates by the same degree earlier this morning. Two- and ten-year yields remain slightly below their US equivalents - but could rise during the press conference if Tiff Macklem sounds more hawkish than anticipated. 

Yesterday’s unexpectedly-weak core inflation print triggered a rally in risk-sensitive assets, but optimism faded after Vladimir Putin said peace negotiations were at a “dead end” and Fed Governor Lael Brainard warned policy rates would climb “expeditiously” toward neutral this year. The US 10-year is trading near 2.67 percent, down sharply from 2.83 yesterday morning, while the dollar is trading on a stronger footing.