Bank of Canada Hikes Rates 25 bps to Highest Level Since 2008, Signals Holding Pattern

Bank of Canada raised the target for its overnight rate by 25bps to 4.50% in January 2022, as expected. The move follows the aggressive hikes at the last four meetings. It was the eighth consecutive rate hike pushing borrowing costs to the highest level since 2008. Notably the BoC Governing Council said “If economic developments evolve broadly in line with the MPR outlook, Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases”. There is a press conference scheduled for today at 11am ET hosted by Governor Macklem and SDG Rogers.

Bank of Canada Building

BoC Highlights

    • The overnight rate is now 4.50% Prior overnight rate was 4.25%
    • If economic developments evolve broadly in line with the MPR outlook, Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases
    • Inflation is coming down in many countries, largely reflecting lower energy prices as well as improvements in global supply chains
    • Inflation is projected to come down significantly this year
    • Governing Council is prepared to increase the policy rate further if needed to return inflation to the 2% target
    • The BOC estimates the global economy grew by about 3½% in 2022, and will slow to about 2% in 2023 and 2½% in 2024, which is slightly higher than in Oct
    • In Canada, recent economic growth has been stronger than expected
    • There is growing evidence that restrictive monetary policy is slowing activity, especially household spending
    • BOC expects 1% growth in 2023, weighted towards the back half vs +0.9% prior. Sees 1.8% GDP growth in 2024 vs 2.0% prior
    • Sees inflation this year at 3.6% vs 4.1% prior. Sees 2024 at 2.3% vs 2.2% prior
    Canada Interest Rate
     Bank of Canada overnight rate

    Market Reaction

    • UPDATED US to the Canadian dollar fell after the Bank of Canada hiked rates, as expected, but also signaled a shift to the sidelines. USSD/CAD to 1.3407 from 1.3350 before the decision.

    Bank of Canada’s Quarterly Monetary Policy Report (Dec 2022)

    • 2022 GDP seen at 3.5% vs 3.3% prior
    • 2023 GDP seen at 1.0% vs 0.9% prior
    • 2024 GDP seen at 1.8% vs 2.0% prior
    • 2022 CPI was 6.3% vs 6.9% expected
    • 2023 CPI seen at 3.6% vs 4.1% prior
    • 2024 CPI seen at 2.3% vs 2.2% prior
    • Output gap in Q3 shrank to between 0.25% and 1.25% from 0.50% and 1.50% in Q2
    • Slowdown in economic activity abroad, especially in the United States, is starting to weigh on exports thought recent CAD depreciation partially offsets this
    • High energy costs seem to have passed through to inflation much more than usually, it will take time for these impacts to recede
    • Global growth seen at 1.6% in 2023
    • Bank views around inflation outlook as roughly balanced, but upside risk is of greater concern due to persistently high inflation
    • Inflation seen returning to 2% target around end of 2024
    • A couple of quarters with growth slightly below zero is just as likely as a couple of quarters with small positive growth

    BOC’s Macklem and Rogers hold press conference to follow at 11 ET.

    Bank of Canada Full Rate Statement for November 2022

    The Bank of Canada today increased its target for the overnight rate to 4½%, with the Bank Rate at 4¾% and the deposit rate at 4½%. The Bank is also continuing its policy of quantitative tightening.

    Global inflation remains high and broad-based. Inflation is coming down in many countries, largely reflecting lower energy prices as well as improvements in global supply chains. In the United States and Europe, economies are slowing but proving more resilient than was expected at the time of the Bank’s October Monetary Policy Report (MPR). China’s abrupt lifting of COVID-19 restrictions has prompted an upward revision to the growth forecast for China and poses an upside risk to commodity prices. Russia’s war on Ukraine remains a significant source of uncertainty. Financial conditions remain restrictive but have eased since October, and the Canadian dollar has been relatively stable against the US dollar.

    The Bank estimates the global economy grew by about 3½% in 2022, and will slow to about 2% in 2023 and 2½% in 2024. This projection is slightly higher than October’s.

    In Canada, recent economic growth has been stronger than expected and the economy remains in excess demand. Labour markets are still tight: the unemployment rate is near historic lows and businesses are reporting ongoing difficulty finding workers. However, there is growing evidence that restrictive monetary policy is slowing activity, especially household spending. Consumption growth has moderated from the first half of 2022 and housing market activity has declined substantially. As the effects of interest rate increases continue to work through the economy, spending on consumer services and business investment are expected to slow. Meanwhile, weaker foreign demand will likely weigh on exports. This overall slowdown in activity will allow supply to catch up with demand.

    The Bank estimates Canada’s economy grew by 3.6% in 2022, slightly stronger than was projected in October. Growth is expected to stall through the middle of 2023, picking up later in the year. The Bank expects GDP growth of about 1% in 2023 and about 2% in 2024, little changed from the October outlook.

    Inflation has declined from 8.1% in June to 6.3% in December, reflecting lower gasoline prices and, more recently, moderating prices for durable goods. Despite this progress, Canadians are still feeling the hardship of high inflation in their essential household expenses, with persistent price increases for food and shelter. Short-term inflation expectations remain elevated. Year-over-year measures of core inflation are still around 5%, but 3-month measures of core inflation have come down, suggesting that core inflation has peaked.

    Inflation is projected to come down significantly this year. Lower energy prices, improvements in global supply conditions, and the effects of higher interest rates on demand are expected to bring CPI inflation down to around 3% in the middle of this year and back to the 2% target in 2024.

    With persistent excess demand putting continued upward pressure on many prices, Governing Council decided to increase the policy interest rate by a further 25 basis points. The Bank’s ongoing program of quantitative tightening is complementing the restrictive stance of the policy rate. If economic developments evolve broadly in line with the MPR outlook, Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases. Governing Council is prepared to increase the policy rate further if needed to return inflation to the 2% target, and remains resolute in its commitment to restoring price stability for Canadians.

    Information note

    The next scheduled date for announcing the overnight rate target is January 25, 2023. The Bank will publish its next full outlook for the economy and inflation, including risks to the projection, in the MPR at the same time.

    Source: Bank of Canada

    From the TradersCommunity News Desk