Economy

Bank of Canada surprises with smaller-than-expected interest rate increase By Stocksak


© Stocksak. FILE PHOTO. Governor of Canada Tiff Macklem poses outside the Bank of Canada building, Ottawa, Ontario, Canada, June 22, 2020. REUTERS/Blair Gable

TORONTO (Stocksak) – The Bank of Canada announced a smaller-than-expected 50-basis point rate hike on Wednesday and said future increases would be influenced by its assessment of how tighter policy was working to slow demand and ease inflation.

In a regular decision, the central bank raised its policy rate to 3.75% from 3.25%. Since March, rates have increased by 350-bp. Economists and money market traders were betting on a 75-bp change ahead of the decision.

STORY:

MARKET REACTION: CAD/

LINK:https://www.bankofcanada.ca/2022/10/fad-press-release-2022-10-26/

COMMENTS

STEPHEN BROWN, SENIOR CANADA ECONOMIST, CAPITAL ECONOMICS

“Today’s…interest Rate Hike…is a sign that the Bank of Canada is growing more confident that its actions will suffice to eradicate inflation. However, by doing less than the markets were pricing in, it risks sending a too dovish message that it will eventually have the reverse.”

“After spending the last two months telling us that the only thing that matters for the policy outlook is core inflation, inflation expectations and the tightness of the labour market, the Bank dropped down to a 50 bp hike today – despite elevated core inflation, inflation expectations and the tightness of the labour market. Forecasters were surprised to see that consensus shifted to a 75-bp increase following strong core CPI data last Wednesday. It is hard to see much justification for the slower pace of tightening in the Bank’s new forecasts either.”

“While the Bank slowed its pace of tightening, it reiterated its opinion that ‘the policy rate will need to increase further At a minimum, that means there is one last interest rate hike ahead, which is 25 bp. However, due to the stickiness and core inflation, the terminal interest rate may still end up a bit higher than that.

JIMMY JEAN CHIEF ECONOMIST, DESJARDINS GROUP

“It is surprising to see Bank of Canada going against consensus expectations and the market on the dovish side. It’s just that, given their past tendency to not challenge market pricing, that’s why they thought they would go ahead and give 75 (basis points). It seems to indicate that they are now acknowledging the impact they have already seen. This is very clear in the statement. That’s a welcome change. It means we no longer have to adhere to the 75 basis points approach at every meeting. We can instead take the appropriate measure of the response.

“They still claim that they will continue to increase. Could it be 50 basis point? Or could it be 25 basis points? That’s certainly possible and will depend on the data. They are recognizing, however, that they need to be cautious at this point. We have multiple indicators that suggest that we are playing with fire if they think we can follow up the Fed to 5% or more.

“They have always believed that a soft landing was possible in the past. Macklem might have moved away from that argument, arguing that the path was becoming narrower. There will be recession. This is our forecast. But there is still a lot to be uncertain about that. Their new forecast is more accurate to this uncertainty. We know that there will be slowing growth and recessions, but we also know that the rate hikes will cause things to worsen from now on. Therefore, it is important to slow down and have faith that these rate hikes will produce the lower inflation rate that we desire.

MICHAEL GREENBERG SVP PORTFOLIO MANAGER FRANKLIN TEMPLETON INSURANCE SOLUTIONS

“It was surprising… maybe the urgency would have been communicated via a 75 basis-point hike is lower but the destination seems pretty clear. They still believe they have an inflation issue, they are still concerned about inflation expectations becoming entrenched, and they are keen to return the interest rate to a more neutral level.

“There will be more rate increases, it just seems that the concerns about the economic fallouts and the financial stability fallouts of raising rates so aggressively are starting to weigh on them a bit, and they took their foot off of the gas a bit.”

DOUG PORTER, CHIEF ECONOMIST, BMO CAPITAL MARKETS

“It’s mildly surprising, but not shocking. It was a close call between 50-75 (bps rate hike). The Bank of Canada is clearly stating that it’s approaching the so-called terminal rate. I think they wanted to offer more options.

“They are probably also guided somewhat in part by the slowdown in employment, home sales, and manufacturing sales. I think that the fact that they also warned rates would rise further, is a slight advantage over the expected increase.

“I don’t believe this changes the larger picture. We would still be happy with the bank raising interest rates to slightly above 4%.

News Source and Credit

Stocksak Editorial

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