In a surprising turn of events, the Bank of Canada decided to raise its interest rate from 1.5% to 2.5%, against a widely-expected 75 basis-point increase – although JPMorgan correctly predicated a 100 bps increase.
Canada’s central bank surprised markets on Wednesday, announcing a colossal 100 basis-point jump to its policy rate. The sudden move was not anticipated by markets and economists, and marks the biggest increase in borrowing costs since 1998. Policy makers led by Governor Tiff Macklem acknowledged that inflation has become entrenched, warning that further supercharged efforts to rein in consumer prices are forthcoming.
“With the economy clearly in excess demand, inflation high and broadening, and more businesses and consumers expecting high inflation to persist for longer, the Governing Council decided to front-load the path to higher interest rates,” the bank explained in a statement.
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Wednesday’s rate hike follows two consecutive 50 basis-point increases in April and June, bringing the Bank of Canada’s overnight rate within the midpoint range of 2% and 3% — a range where monetary policy still remains neutral.
The central bank also updated its near-term inflation outlook, with policy makers now expecting price gains to hit 8% in the middle of 2022, before slightly subsiding to 7.5% by the end of the year. Inflation is not expected to return to the 2% target range until 2024, the bank’s accompanying statement read.
Policy makers also downgraded Canada’s GDP output, and are now expecting the economy to expand only 3.5% in the current year and 1.8% in 2023, against previous forecasts calling for output growth of 4.2% and 3.2%, respectively. The central bank also released a risk scenario in which a “self-reinforcing wage hike and price spiral” could erupt should inflation persistently remain above its 2% target range.
On the heels of an astonishing 9.1% inflation print in the US, it appears that the panic at Canada’s central bank has jumped into overdrive. Macklem was quick to acknowledge that policy makers errored in their inflation forecasts, laying blame on unexpected global events as well as domestic real estate markets.
The central bank said that Canada’s housing market has already significantly weakened from the “unsustainable pace” witnessed during the height of the pandemic, and is now warning that both home prices and real estate transactions will slow in 2023 in reflection of rising borrowing costs.
What a policy change from just two short years ago.
Information for this briefing was found via the Bank of Canada and the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
