Bank of Canada surprises With 50 bps Increase, Says Little Recession Possible By Stocksak

© Stocksak. FILE PHOTO – Tiff Macklem, Bank of Canada Governor, participates in a news conference held in Ottawa, Ontario, Canada, April 13, 2022. REUTERS/Blair Gable

By Julie Gordon & David Ljunggren

OTTAWA (Stocksak) – The Bank of Canada announced a smaller-than-expected interest rate hike on Wednesday and made clear more increases were still needed, even as it forecast the economy could soon slip into a slight recession.

The central bank raised its policy interest rate by half a point to 3.75%. This was a 14 year high, but the bank failed to make 75 basis points. It has raised rates by 350 basis point since March, making it one of its most rapid tightening cycles.

Michael Greenberg (portfolio manager at Franklin Templeton Investment Solutions) said that the rate decision was “a bit of surprise”. He added that inflation was still a problem, and that more hikes were likely.

He said, “It just seems that the concerns about the economic fallouts and the financial stability fallsout of raising rates so aggressively are maybe starting to weigh upon them… and therefore they took their foot off a little bit.”

In its quarterly Monetary Policy Report the bank stated that growth would slow later in the year and early next. This “suggests” that a few quarters with growth slightly below 0 are just as likely than a few quarters with little positive growth.

According to forecasts, a technical recession could be caused by two quarters of consecutively negative growth in the fourth quarter of 2022 or the second quarter.

The darkening outlook likely influenced the decision for 50 basis points. However the warning that rates still need higher “takes a little edge off,” said Doug Porter chief economist at BMO Capital Markets.

Although the bank stated that there was an increase in inflation and expectations due to ongoing demand pressures, it added language about how those increases would be determined.

It said that future rate increases would be affected by our assessments of how tighter the monetary policy works to slow demand, how supply issues are resolving, as well as how inflation and inflation expectations respond.

While inflation has declined to 6.9% in September after a peak of 8.1% during June, core measures are still robust and well-founded. The central bank revised down its inflation outlook due to lower commodity prices and less disruptions in the supply chain.

According to the bank, inflation is expected to return back to the top of the range of 1%-3% control by 2023 and to the target of 2% by 2024.

After touching a three week high of 1.3509, the Canadian dollar traded almost unchanged at 1.3610 against the greenback (73.48 U.S.cents).

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Stocksak Editorial

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