Canada: Bank of Canada hikes rates by 100 basis points in July
On 13 July, the Bank of Canada (BoC) raised its target for the overnight rate from 1.50% from 2.50%, marking the fourth consecutive rate hike this year. The Bank also said it was continuing its Quantitative Tightening (QT) policy by no longer reinvesting in maturing government bonds.
The decision aimed to tame inflation, which was “higher and more persistent” than the Bank expected, with the BoC stating it saw inflation remaining around 8% in the near term. The Bank also highlighted rising core inflation, which indicates that strong domestic demand is exacerbating external price pressures. The aggressive rate hike was also designed to keep inflation expectations anchored, with surveys showing that consumers and businesses see inflation staying higher for longer.
In its forward guidance, the Bank reiterated that interest rates would need to continue to rise in order to ensure inflation converges to the 2.0% target. The Consensus is currently for a cumulative hike of slightly more than 75 basis points by end-2022, although estimates range from 50 to 150 basis points.
Analysts at Goldman Sachs were particularly hawkish:
“We continue to expect a 75bp hike in September, which would push the policy rate 25bp above the 3% upper end of the BoC’s neutral range. [ ]. Further out, we have left our hawkish forecast for the terminal rate unchanged at 4¼% and expect rate hikes of 50bp in October, and 25bp in December.
In contrast, the EIU was more dovish:
“We expect the BoC to continue its tightening drive to slow the pace of inflation. We have revised our forecast and expect one 50-basis-point increase at the BoC’s next meeting in September before the central bank resumes more traditional 25-basis-point rises throughout the remainder of the year. This will push the overnight rate to 3.5% in the fourth quarter.”
The BoC’s next policy announcement will be on 7 September.