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Canada Monetary Policy April 2022

Canada: Hawkish Bank of Canada raises rates in April, ends its reinvestment phase

At its meeting on 13 April, the Bank of Canada (BoC) raised its target for the overnight rate to 1.00%, up from 0.50% in March, marking the second consecutive rate hike this year. The Bank also announced the end of the reinvestment of maturing bonds, entering a period of Quantitative Tightening (QT) starting on 25 April. This will lead to a notably smaller balance sheet, as around 40% of government bonds will reach maturity over the next two years.

The Bank’s decision chiefly addressed the recent surge in inflation: February’s figure reached 5.7%, exceeding the Bank’s 2.0% target. The war in Ukraine was identified as a major source of uncertainty, fueling price spikes in energy and other commodity markets, as well as supply chain disruptions. The onset of excess domestic demand and tight labor markets, given a successful vaccination campaign and solid consumer spending, also motivated the hike.

Going forward, additional upward adjustments to the policy rate are expected; the Bank asserted that “interest rates will need to rise further” considering the current climate of excess demand and above-target inflation. Further policy tightening may be also achieved through a more aggressive QT policy. The majority of our panelists expect several more rate hikes before the end of the year.

On potential for more rate hikes, ING’s chief international economist James Knightley remarked:

“There is little to suggest any meaningful changes in the global backdrop imminently and with such a strong domestic story […] we look for another 50-basis-point hike on 1 June with the policy rate set to hit 2.75% before year-end.”

Desjardins’ Randall Bartlett was more dovish:

“Governor Macklem chose to set Canadians up for another round of aggressive action in June by suggesting that the Bank could continue to raise rates ‘forcefully’, if needed. That opens the door to another 50-basis-point hike at the next announcement. Still, we see the overnight policy rate ending the year around 2%. We see scope for some further tightening in 2023, but don’t believe the BoC will match the Fed in taking rates above 3%, given the greater weight of real estate in the Canadian economy.”

The BoC’s next meeting will take place on 1 June.

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